Points and Percentages

A quick note for investors concerned about recent volatility in the stock market. That’s what a blog is good for (maybe), right? On January 26, the Dow Jones Industrial Average reached 26,616.71. The S&P 500 index reached 2,872.87 that same day. On February 5th, they closed at 24,345.75 and 2,648.94 respectively. On February 6th as I write this, the averages are back up. That’s around an 8% drop in short order.

What does this mean to investors? It depends. Are you a long term investor with a longer than five year time horizon? Or are you a short term investor? Are you a speculator? Long term investors should pay absolutely no attention to this move – its commonplace. Frankly, this was to be expected eventually. Short term investors shouldn’t be too concerned because you should only have limited exposure to stocks if any at all. If you have a high exposure to stocks (above 50% of your assets) with a short term time horizon (less than five years), you’ve learned a valuable lesson. If you use an advisor, fire her unless of course you agreed to withstand losses such as these quietly, no complaining. Speculators relish this volatility. These are markets that theoretically offer opportunities to make money. They serve an important purpose in providing liquidity to the rest of us. This blog is directed toward long term investors.

Two points I want to make:

  1. Pay zero attention to the financial media in times like this. The amount of points the market averages dropped are meaningless. A more insightful measure is the percentage drop. Also, no one knows specifically why this happens – there are numerous possible reasons and likely it is a combination of many of them.
  2. The only reason a long term investor would change their investment allocation is because of a change in their life’s circumstances. New job, no job, big raise, big pay cut, lotto winnings(!), death, long term illness, mid-life crisis (No, just kidding!)… 

The economy appears to be strong, inflation low, unemployment low, and corporate earnings solid. This looks like a normal correction that occurs more often than people realize. It could be due to the fear of an overheating economy; rising interest rates; profit taking; the winter Olympics…or not, who knows? We’ve actually been in a very low volatility environment for some time now – that’s what’s odd. Focus on maintaining a proper amount of risk for your circumstances and stay diversified and disciplined.