This does not matter

Over the last hour or so, I got one news alert after another. The Wall Street Journal titled “Breaking News: The Dow Jones Industrial Average sank more than 760 points, or 2.9%, in its biggest one-day percentage decline since December”. Bloomberg titled: “U.S. Stocks Extend Drop to 2.5%, Head for Biggest Slide of Year”. And even the Washington Post chimed in with: “Wall Street just wrapped up its worst day of the year. Here’s our analysis of the winners and losers”.

Here’s my advice for you: Do not click on these links and don’t read these stories. None of the things that happened today in the markets are likely to matter for you anyway. Unless you are a day-trader – in which case I recommend you change jobs – the daily gyrations of stock markets are irrelevant for you.

For most investors, the investment horizon is many years long, often more than a decade. In my case, my equity investments are part of my retirement savings and my retirement is, unfortunately, still about twenty years away. But even if you are already retired, you are likely to live another decade or so, in which case your investment horizon is still many years long.

So here is an exercise for you. Produce a chart of the S&P 500 that corresponds to your investment horizon. If you don’t have access to a website that does that for free, take a look at the chart below, which shows the last ten years of the S&P 500 on a daily basis. Now try to identify all the days, in which the S&P 500 dropped 3% or more as it did today. Can you do it?

If your answer is no – and nobody can do it, really, so it should be “no” if you are honest – then you just proved to yourself that in the bigger scheme of things, a day like today does not matter. In fact, look at the chart below and try to find the time when the US almost went into default and recession fears plagued the stock market and caused an almost 20% drop. Hint: if you don’t remember it, that was in summer 2011 and we were all scared to death about the next global financial meltdown.

Sit back, relax and enjoy the show, but for heaven’s sake, don’t touch your portfolio and try to sell “losers” and buy “winners”! 

S&P 500 over the last ten years

Source: FRED, St. Louis Fed.

PS: When will the media stop quoting how many points the Dow dropped? A drop of 700 points today is so much more common than it was in 1999 simply because the index is a multiple of what it was back then. What matters are percentage changes not points. And don’t get me started about quoting this Frankenstein of an “index” that is the Dow Jones Industrial…