How not to get swept up in financial hysteria

I remember a day back in high school when the TV news and newspapers reported that the Dow Jones Industrial Average (a common measure of the condition of the U.S. stock market) had experienced its largest drop in a single day since the Great Depression. On that day in October 1987, still known today as “Black Monday”, the Dow fell 508 points. Fast-forward more than 30 years to February 2018. You may recall how, after more than a year of stocks seemingly going nowhere but up, the party ground to an abrupt halt. On one particular day, February 2, the Dow dropped 666 points. Now, 666 is more than 508, so that means this drop must’ve been even worse than Black Monday, right? Wrong! Back in October 1987, 508 points amounted to a 22% drop in the Dow, meaning the Dow lost more than ⅕ of its value in a single day. (It took less than two years to fully recover.) But in February 2018, 666 points amounted to a mere 2.5% drop in the Dow! That’s because the Dow was so much higher in February 2018 than it was in October 1987.

So why do the media insist on talking about drops in the stock market in terms of points instead of percent? Well, which sounds scarier to you: “a fall of 2.5%” or “a fall of 666 points, even larger than the record fall of 508 points posted on Black Monday back in 1987”? The media live and die by viewership numbers, and they know they can drive those numbers up by stoking people’s fears. That’s why we’re exposed to a never-ending cacophony of Chicken Littles warning that the sky is falling. I’ll never forget a presentation I attended back in my days as a financial advisor. There was a Powerpoint slide showing an assortment of Time Magazine covers with doom-and-gloom headlines like “The Debt Bomb: The Worldwide Peril of Go-Go Lending”. All of the headlines sounded topical for the time (2014), and still do today. But then, it was revealed that those magazine covers were all from 1982-83! Which means all of that doom and gloom was published in the very early stages of an 18-year run that saw the Dow go up tenfold! Fast-forward to today: it’s been almost 10 years since the worldwide financial crisis that saw the Dow plunge by more than 50%. Yet ever since then, “experts” have been predicting that the next market crash is just around the corner. Now, eventually, they’ll be right (and protecting your money against that eventuality will be an ongoing thread in my writing), but that’s like saying a broken clock will eventually be right! Does that mean you can trust a broken clock to tell accurate time?

To be sure, there are times when it does make sense to get out of an investment (again, that will be an ongoing thread in my writing). But getting spooked by something you heard or read is not one of those times. And for those of you who are passively investing in index funds (whether on your own or through some type of advisor): you might think this doesn’t apply to you, but think again! The folks who sold out of the stock market at or near the bottom of the financial crisis in 2008-09 weren’t the ones trying to time the market; they were the ones trying to stick to the plan of “stay the course no matter how bad things get”. What happened was that things got so bad that they lost their resolve and jumped ship out of panic. And many of them were so traumatized by the experience that they’ve missed out on all the good times in the market that have come since then!

If you find yourself tempted to abandon ship whenever you hear anything negative about the stock market or the economy, I have good news: you can sign up for a free newsletter called Big Market Trends. The main featured writer is a financial industry veteran by the name of J.C. Parets. This man spends hours each day analyzing charts from financial markets the world over, so he’s more in touch than most people with what’s actually going on. He uses that knowledge and evidence to poke holes in the claims of media pundits and to debunk commonly held assumptions about the stock market. And he writes in plain English! Reading J.C.’s articles can do more than just provide you with a great financial education - it can help you filter out the noise and develop the discipline to not let your emotions take over your investing decisions. And did I mention it’s free?