No, they didn’t.
The markets are among the least volatile things in commerce.
EVERY trader looks like this, all the time. He could have just found out that his daughter got engaged and he'd still look the same way. "Crap, now I have to pay for a g.d. wedding."
Last Thursday, the Dow fell 11 points, which is a big enough story to lead the business news. Considering that the Dow opened the day at 12,037, that means it lost a crushing .09% of its value.
Granted, that means that at that rate, the Dow’s entire value would be worthless by May 2015.
By the same logic, the temperature in Fairbanks, AK was 85º on July 9 and -15º this morning. At that rate, by May 2015 Fairbanks will hit absolute zero, everything will turn solid and motion will stop.
These things are cyclical. Everything rebounds, and it usually doesn’t take that long.
| Biggest Dow % losses of the last 75 years | |
| October 19, 1987 | 22.6 |
| October 26, 1987 | 8.0 |
| October 15, 2008 | 7.9 |
| October 18, 1937 | 7.8 |
| December 1, 2008 | 7.7 |
| October 9, 2008 | 7.3 |
| October 27, 1997 | 7.2 |
| September 17, 2001 | 7.1 |
| September 29, 2008 | 7.0 |
The chance that 6 of the 7 biggest losses of all time would happen in the same 19-day annual period are 145,337 to 1.
Why was October 19, 1987, a/k/a Black Monday, such an outlier?
Two major reasons.
The market was unduly, maybe artificially high that morning, fueled by speculation that had kept the Dow rising all summer. The Dow was actually higher at the end of 1987 than at the start.
Also, it took the traders a while to get used to new technology. This was the first time that firms could program computers to take certain orders at certain prices. Not only that, but for the first time brokers could now process orders contingent on what level other stocks were selling at. A shareholder of railroad operator XYZ could order his broker to sell if railroad stock JKL fell to a certain price. We take this for granted now, but back then the traders were still only recently removed from executing every trade by hand.
What happened a week later?
Overworry. The traders were reeling from the previous week’s fall, plus all weekend long they were anxious to get to work and act conservatively – i.e. get into cash and not be part of the volatility. That works fine for one trader, but when everyone does it, you get the very volatility you were trying to avoid – the human equivalent of cows overgrazing on public lands, then ultimately going hungry.
Same thing. This one is attempting to negotiate with God, swearing to quit snorting coke once and for all if He'll only let the dry cleaner not notice the baggie he left in his suit pocket
What are the chances of 4 of the top 9 losses coming in the same 9-week period in 2008, during which we not only elected a new president, but had one of the two biggest ideological shifts in history between a president and his successor?
283,026,075 to 1. Almost the same as the chances of us choosing a person at random in the United States, and that person turning out to be you.
Does that mean we’re heading to an inevitable future of up-and-down stock prices? Not necessarily, and this will wrap up nicely with one more chart, below.
Look at the numbers. A 7% loss happens about once a decade. People frequently lose 7% of their savings balances – withdrawing $140 when you have $2000 in the account – and rarely feel aghast about it. How is that different than if it happens with any other investment (or in the case of the Dow, a representation of a mere 30 investments of the hundreds of thousands available)?
Oh, one more thing:
| Biggest Dow % gains of the last 75 years | |
| 4 days after the 6th biggest loss | 11.1 |
| 15 days after that, i.e. 13 days after the 3rd biggest loss | 10.9 |
| 11 days after the biggest loss | 10.1 |
| 3½ months after the 5th biggest loss | 6.8 |
If you want to sell your position in a Dow index fund, and you’re worried that it isn’t at a high enough price, wait a couple of weeks.
Here are the top 20 advances and declines of 2010:
| May 10 | 3.90 | May 20 | -3.60 |
| May 27 | 2.85 | May 6 | -3.20 |
| July 7 | 2.82 | June 4 | -3.15 |
| June 10 | 2.76 | June 29 | -2.65 |
| September 1 | 2.54 | February 4 | -2.61 |
| December 1 | 2.27 | July 16 | -2.52 |
| June 2 | 2.25 | August 11 | -2.49 |
| June 15 | 2.10 | January 22 | -2.09 |
| July 22 | 1.99 | May 4 | -2.02 |
| August 2 | 1.99 | January 21 | -2.01 |
| November 4 | 1.96 | April 27 | -1.90 |
| September 24 | 1.86 | November 16 | -1.59 |
| October 5 | 1.80 | May 14 | -1.51 |
| February 16 | 1.68 | October 19 | -1.48 |
| August 27 | 1.65 | June 22 | -1.43 |
| November 18 | 1.57 | April 30 | -1.42 |
| February 9 | 1.52 | June 24 | -1.41 |
| January 4 | 1.50 | August 19 | -1.39 |
| July 13 | 1.44 | August 30 | -1.39 |
| May 12 | 1.38 | May 7 | -1.33 |
Just about every large movement (to the extent that these movements are large) is nullified by a comparable movement on the other side of the ledger. If this doesn’t convince you to buy-and-hold, and not obsess over daily market movements, nothing will.
**This post is featured in the cupid edition of the Carnival of Personal Finance**
and
How to invest with inflation still in the distance
Every Friday we review and rework a post we’d written months earlier for someone else’s site. This lets us test our theories, and the content-to-input payoff with these posts is pretty sweet, too.
This is from Consumerism Commentary. Updated notes in blue:
People have feared inflation ever since… well, since the dollar’s last rampant bout of inflation in 1977. However, there’s every reason to believe that this time inflationary pressures are too overwhelming to discount. (The consumer price index rose 1.1% in 2010. In other words, inflation remains low thanks to the Fed’s tight monetary policy. Now if we keep predicting inflation, sooner or later we’ll be right. But for the last 10 months, prices have been even stabler than they were the previous 10 months – when annualized inflation was 1.9%. In short, we were wrong in the short-term.) Or two colossal reasons, at least:
1. Legislative and executive leaders of the federal government, for whom fiscal restraint is a dirty term. No matter how laudable their objectives, they propose to spend and borrow an ungodly amount to achieve them. Any non-politician reading this blog knows the term “regardless of cost” can never be taken literally, but our elected betters think otherwise and aren’t concerned about the inevitable results.
2. A federal funds rate that resembles Carlos Pena’s batting average, or Countdown with Keith Olbermann’s Nielsen ratings. Here’s a really quick primer, because a lot of people act like they know this stuff but don’t:
The Fed (Federal Reserve) is the nation’s central bank. It actually creates our money out of thin air, which it sells to the federal government to conduct its business with. Commercial and investment banks like Chase and Wachovia (whoops. Wachovia, now a subsidiary of Wells Fargo) also borrow from the Fed. The interest rate those banks pay is determined by the Fed and called the federal funds rate, which thus serves as a basis for just about every interest rate in the economy.
Most countries’ central banks set a single rate. The Fed instead sets a range — the more you borrow, the less you pay. This of course favors larger banks, although “favors larger banks” has been a relative term ever since the federal government confiscated $678 per United States citizen and gave lent it to AIG. Since December the range has been 0% to 0.25%, an all-time nadir. (Well, how about that. It hasn’t moved since. And Carlos Pena finished the season at .196, the worst batting average in the majors among guys who qualified for the title.) Inflation has kept pace (see above), barely registering and keeping the dollar’s value intact while jobs disappear. The range eventually has to rise, since it can’t go in any other direction. Once it rises, in concert with the demand for additional dollars that government spending is creating, inflation should ensue.
What does this mean in practical terms? It means getting your assets the hell out of cash, or at least out of U.S. dollars.
(Note: We’ve long advocated quoting the price of a dollar in terms of gold, instead of the other way around. Details here, but suffice it to say that the dollar has lost an annualized 28% of its value since this post first ran.)
The immediate temptation is to shop the world for the currencies the dollar will lose the most money against. There are candidates such as the New Zealand dollar and the CFA franc, but again, your investment will only then be as safe as that government’s fiscal conservatism.
One strategy that goes a step farther is to look at blue chip stocks that don’t trade in U.S. dollars. If the stock’s fundamentals are strong enough, it shouldn’t matter if it’s measured in Swedish kronor, Swiss francs, or almost any currency short of Zimbabwean dollars. Even if a localized bout of inflation causes the stock’s nominal price to artificially rise, its real price should remain consistently strong.
Here are some examples of giant corporations that don’t necessarily trade on the Big Board nor NASDAQ:
Yes, Toyota. Exhale. And while extolling the benefits of a particular security might make the author come across as a boiler room stock promoter, I’m not telling you to buy anything. I’m telling you to look critically at the reasons for a stock’s atypical behavior.
The fun part! What did those stocks do since then?
Let’s start by looking at which ones we chose. One of those companies had some bad if undeserved PR since we posted. That company’s public image would have taken a historic beating, the worst of the year, if another company on the list didn’t have a problem was 1000 times worse. Yeah, BP won’t want to relive last summer anytime soon. We chose these stocks 3 weeks before the Gulf of Mexico disaster, too.)
This is all syncopatic, to use a pseudo-word. We’ve also written at length about what a bargain BP stock is. But that was after Deepwater Horizon.
Royal Dutch Shell, up an annualized 41%.
BP, down an annualized 43%. However, it’s up almost an annualized 100% since its July nadir and continues rising.
Toyota, down since April on the Nikkei but making huge strides since the fall. Here’s the chart. Toyota was trading at 3750 when our exercise began. Prices in yen:
If you think a week of questionable publicity in one market can turn the world’s largest and most respected automotive company into a bad investment, you shouldn’t be investing in anything more demanding than an index fund. A few months from now, no one will remember the recent uncomfortable performance that the parent company of two of Toyota’s major competitors forced the company to undertake.
Furthermore, this is a perfect time to go contrarian. Toyota shares have dropped 20% in the last month. Think about why that might happen to a stock.
Gold is the traditional inflation hedge, but when you see an investment being sold during commercial breaks on general-interest TV shows, that opportunity has clearly evaporated. Besides, gold’s value has quadrupled in the last 8 years. (And has been growing even faster ever since.) That’s swell, but if you’re looking to preserve wealth, remember that time continues to move forward, not backward.
What about Treasury Inflation-Protected Securities, whose defensive strength is written right into their very name? These are a type of U.S. bond whose interest rate, as you can probably figure out, factors inflation in. TIPS are great in theory, as long as you can trust the government’s consumer price index numbers and you can trust the government’s ability to honor its debts. “Full faith and credit of the United States government” doesn’t mean quite the same now as it did when the phrase was coined.
**This post is featured in the Totally Money Blog Carnival 2**