Is this the start of the next stock market crash?

The stock market was down today and my office was awash with talk of a stock market crash.

dow jones

“There goes my retirement,” said one of my older coworkers, partially in jest but it was the younger crowd that seemed more worried. I work in a place where no one ever talks about their investments but today that changed. People know that I’m interested in investing but I rarely get any bites when it comes to investment conversations. Suddenly, I was deluged with instant messages from people asking if they should take their money out of the market.

“Is this the start of something bad?”

I didn’t really know how to answer that.

“This is the stock market,” I said, “this is how it works.”

It wasn’t a great answer but the best I could come up with. The truth is often just that simple. Sometimes and more often than not stocks go up but sometimes they go down. Sometimes they go down a lot and for extended periods.

“Is that time now?” 

Who the hell knows!

It’s interesting because no one has mentioned the recent bull run in the office. The S&P 500 has been on an almost uninterrupted rise since 2009. There was a blip here and there but we’ve gone from the high 600s in 2009 to nearly 2900 before this latest drop.

Why was that? Why do we ignore the rise but seem so laser focused on the drop? The obvious answer is that we feel the sting of a loss much more than we revel in the success of a gain. That’s true but I think there’s more to it than that.

Have we as investors become so used to the market being so giving that this comes as a shock?

This IS how the stock market works. It’s not a regular thing but it’s not abnormal. I think it’s important to remember that. That doesn’t mean today was a good day to be an investor. It wasn’t, it sucked but it’s part of investing. I think it has been very easy to forget that in recent years especially if one started investing after 2009.

Part of it was the size of the decline. Today was the largest loss on a point basis in the history of the Dow Jones and in the S&P. The fact that it followed a similar day on Friday was worrying too. Bigger numbers are harder to ignore. This was the first 1000 point decline in Dow Jones history and nearly 400 points more than the 2nd highest daily loss.

That seems bad and while it’s certainly not a good thing, one has to take those numbers in relative terms. The Dow Jones has grown 14000 points since the 2nd highest daily loss. This largest point decline that is all the talk today doesn’t even break the top 20 list of biggest % declines in history. The S&P 500 fits the same mold. The larger the starting point, the bigger the potential fall on a dollar basis.

It’s important to remember that. It’s harder to ignore it. The first 1000 point decline in the Dow may be easy to write off as nothing because it’s doesn’t even crack the top 20 on a % basis but larger numbers lead to larger mistakes. Investors have a tendency to make irrational decisions when things look bleak. Bigger numbers tend to make things look bleaker than they really are.

That doesn’t mean there’s no potential problems ahead but things just aren’t that awful so far.

These last two days have been ugly but the S&P 500 is down 1.74% YTD and the Dow is down 1.93% YTD. That’s not terrible and far from a crash. Both are UP 1% since December 25th. The world is far from over but a day like this can remind you of something.

Stocks aren’t a risk free source of returns.

That’s even more clear these days. High frequency trading and computer driven algorithms can add a level of panic to any sell-off. There was a point where the Dow Jones was down 500 then 700 then 1000 in what seemed like seconds. Suddenly, we were sitting at 1500 below open and things looked grim. I’m sure many people, myself included asked if it’ll keep going.

Today it didn’t. A few minutes later, the downturn turned around and people started buying again. The 1500 reduction turned to 800 but then fell again closing down nearly 1200 points or 4.6%. The S&P 500 was down over 110 points or 4.1%.

If you have a ~500k portfolio like me then you’re talking a daily loss of around 20k. Anyone with a one million portfolio would lose double that. The bigger the numbers, the larger the feeling of loss.

Those numbers aren’t easy to ignore but again it’s important to put them in perspective. My 500k portfolio may have lost 20k today but it’s gained more than 20k since December 25th. The pain of loss stings but it’s important to remember such things if you want to be a successful investor.

Stocks are a long term game. They are not going to go up all the time and can often drop quickly.

If this worries you, makes you stay up at night or forces you to sell then it’s time to re-asses your investment style. It’s time to see if the level of risk in your portfolio is right for your temperament. Stocks are risky, they’re volatile and they can lead to losses especially in the short term. A 100% stock allocation has historically seen a max reduction of 50%. Adding bonds can reduce that significantly.

This is the reality of the stock market. It doesn’t always go up and it certainly doesn’t telegraph where it’s going. It’s hard to tell what caused this recent dip. There wasn’t anything outwardly obvious. Sure valuations are stretched and there’s some political question marks but nothing different than what we’ve seen for a while. Was it partly due to a flash crash or was it just a change in market sentiment and rising interest rates?

Is this the start of a stock market crash or a correction? I certainly don’t know and you probably don’t either. The short term performance of the market is a question mark. That much is clear. It may go up tomorrow or it may go down for weeks. Is it time to sell or is it time to buy? I don’t know.

What I know is that the long term history of the stock market is clear. The trend is up and the successful long term investor is able to ignore days like today just as easily as many seem to ignore the bull market of the past 10 years. They buy when stocks are up and they buy when stocks are down.

The weeks ahead may be painful and ugly but if you’re in this for the long term and believe in the companies and index funds you have then you’ll do well in the long run. Stay the course and know that time in the market is the key to successful long term returns.

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11 thoughts on “Is this the start of the next stock market crash?

  1. Great article Time. Tons of people might view the crash as a bad day or uncomfortable but with a long time horizon, it’s more or less and opportunity to pick up valuable companies at a discount to their intrinsic value. For a lot of these companies, they have to fall 30% +++ before they enter that territory, since they usually trade at a hefty premium. I am in the bleachers patiently waiting. If a 30% drop doesn’t happen, I’ll happily continue investing here and there until it does.

  2. Hi Time, When my investing priorities shifted to generating passive, growing dividend income from stocks I became better able to cope with times like we have had over the past several trading days. It’s unfortunate, but the folks asking you what is going on now, probably do not even understand that concept. They feel like they have no control and only hope the stock market rises for reasons they do not fully understand. I do not mean that in a critical way. It took me many years to learn and I learned mostly the hard way. I just wish those folks would try to better understand what they are doing with their money rather than following the herd. Tom

  3. Nice article mate. Like you mentioned I invested in index funds and I am okay with this drop. To be honest my funds are almost up 15%. So, this drop still keeps me in positive. But, I would love to use this opportunity to buy additional funds. Hopefully the dividend yields pick up. Thankfully I don’t have much of single stock risk.

  4. Right now we are just shy of a correction. we entered correction terrirtory but pulled out of it. it will be interesting to see if it continues. futures look down so we could. The question is is how long will it last? I wasnt planning on putting any in but im transferring some money into my account so i can get some deals on wheels lol.

  5. Great post TITM. Days like today definitely test a persons nerves. If the investor has developed a sound investing strategy and they stick to it, times like today can really pay off. Thanks for putting things in perspective.

  6. “My 500k portfolio may have lost 20k today but it’s gained more than 20k since December 25th. The pain of loss stings but it’s important to remember such things if you want to be a successful investor.” – this is so easy to forget, and I find myself struggling with this feeling as I see my red numbers. So thank you for this reminder!

  7. Very well written article, thank you for sharing. Even though my portfolio also took a hit, I can still sleep well at night because I’m in it for the dividends. And if I do my stock picking correct I can rides the waves as they come.

  8. Nice article, I am diversified and hopefully have 50 + years left to invest in the market. If we do go into a longer bear market correction I will be more aggressive and dollar cost average into the weekness like I did in the early 90s, 2000, and 2008.

  9. Agreed – everyone’s freaking out, but it’s important to remember that we’re in it for the long haul with investing. Traders may be concerned with a dip, but it shouldn’t be a big concern for investors who are well diversified.

    I took advantage of the dip and was able to buy investments that were previously out of my price range. It’s a great chance for new investors like myself. 😉

  10. It didn’t help that at the start, the pundits had no clue as to the reason. Now that it’s pretty much defined as the jobs report triggering volatility resulting in the demise of the XIV, the one thing that concerns me most is the inability to quantify the losses without completing the unwind (which could take a week or two). But through it all, my companies still delivered their dividends and some announced increases and none went under – which made for a buying opportunity.

  11. I’m still in the accumulation phase, so I AM PSYCHED about a correction. I want it to happen. Please go down 20-30-40% or more, my only real metric is how much passive income my portfolio is throwing off and that generally remains constant throughout (assuming you’ve chosen solid companies).

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