- Jim Cantrell
Largest Market Drop in History
Hype. It’s not exactly lying. It’s just not telling the whole story and making things sound a certain way for a certain purpose. In the case of the media, the purpose is to sell news: to make people watch, or listen, or click. The solution is to look beyond the hype and emotion and find the facts and logic.
Just the facts: “biggest point drop” means next to nothing. The biggest one day drop in the market was in 1987. The market dropped 22.6% in one day. The Dow was at about 2246 and dropped 508 points. Only 500 points, but 22%.
The second largest one day drop in the market occurred in 1929. The market dropped over 12% in one day. That was a 38-point drop.
The fact is that point drops are only large or small in relation to the current market levels. Yesterday’s drop was about 1175 points. That is a 4.6% drop. That is big, but it doesn’t even make the top twenty in largest drops in the Dow industrial average. Mostly, it is just a lot of hype.
The big news is that the market is volatile. Wait a minute, who is going to watch, listen, or click to get that news? No one. That’s what causes the hype. Is the market always volatile? The answer is a big whopping YES! That is why we at Financial Strategies, Inc. use the strategies we use. Our rebalancing strategies are designed to take advantage of volatility in the various markets. The only problem we have had is that the volatility has not been big enough.
I will say it again; the market has not been volatile enough. The swings we have seen, first up, and now down, have not been large enough to trigger rebalancing. As we were checking portfolios last week, we were very close to our trigger points. I was preparing the team to rebalance. I kept saying, “Another day or two like this and we will be swamped with rebalancing activity.” We were looking forward to it. Then last week happened.
What do we do? We stick to the strategy. If the markets go down enough, we buy more. If the markets go up enough, we sell a little. However, we must hit the triggers before we move. Our triggers are based on 29 years of experience and reams of academic research. Although it is tempting to get caught up in the hype, we stick to our strategies because they have proven to work. Our strategies require us not to panic, to stay focused, to ignore the hype, and to remain disciplined.
We are not market timers or traders. As I always say, “The best market timer I ever met was right once in a row.” That isn’t good enough for us. We are in this together. My money is invested just like yours. Maybe a little more aggressively, but the strategy is the same. And I can tell you why; I have seen it work over and over and over. Knowing this, we can stay calm, ignore the hype, and rely on our strategies.