At first, I wasn’t even going to write a post about this because I didn’t want to contribute to the noise, but I… can’t… take it anymore! It’s time to get a little rant-y.
So, let’s do this.
In the last couple weeks the stock market has dropped fairly rapidly. The S&P 500 was at a high of about 2873 on Jan 26 and it closed at about 2649 today (Feb 5). That’s a drop of nearly 8% and everyone is losing their freaking minds!
This is ridiculous.
First, I should point out that most people aren’t even freaking out about the value of the S&P 500, a logical index representing the 500 largest companies listed on the major US exchanges. No, instead they’re freaking out about the number of points that “The Dow” dropped. That’s the Dow Jones Industrial Average and it’s a stupid index of 30 companies that makes zero sense!
I’d be happy to keep ranting about The Dow here, but NPR’s Planet Money (one of my all time favorite podcasts) did a much better job of it in this episode. Suffice it to say, the only reason that The Dow is useful is because it’s really old. So, next time you hear someone ranting about how much it went up or down, remember that it’s an absurd thing to keep track of.
Okay, I’ve got that out of my system and will be sticking to references to the S&P 500 values going forward. Moving along…
Everyone’s Freaking Out
Okay, I expected the media to freak out. That’s pretty much what they’re doing 90% of the time about something. This is why I try to watch/read as little news as possible: it destroys happiness.
But it’s not just the media.
My coworkers are freaking out. People on Facebook are freaking out. Even the personal finance blogosphere is freaking out on Twitter.
Now, some people are pointing out that this is an excellent buying opportunity and welcome a plunge in value. Other people seem to be worried that this is the beginning of the end and none of us will ever be able to retire.
The trouble is: they all seem to agree that this is a big deal. I hate to burst your bubbles, but…
it’s really not.
This is normal
You probably think I’m being this dog right now:
But really, it’s more like this:
The fire is all in our collective imagination.
Here’s the thing, we all knew this was coming.
This is a chart of the annual growth of the S&P 500 for the last bunch of years:
Many of us have rightly been assuming for some time that a correction was going to happen because non-stop upward growth is not something that the stock market normally does. It goes up, it goes down, it goes up again. On average, it gains some 7 to 10% per year, but that’s with plenty of volatility.
This kind of steady growth we’ve been having is pretty unusual. It’s been great to see when updating my net worth values every month, but if there was anything newsworthy it wasn’t this week’s drop, it was the crazy long growth with very few downward periods.
So, honestly, if anything, I’m relieved to see the market plunge so much. It says to me that I’m not taking crazy pills, that inflated share prices can’t go on indefinitely.
How should we be feeling?
Thanks for asking, I’ll tell you.
If you’re retired and living on capital gains by selling stocks, okay, this might seem a little scary. You’ll get less for each share you sell.
But, you knew this was coming right? You knew that the gains in that chart above were not going to last forever and hopefully the 21.83% gain of 2017 was just icing on your cake. If it plunges further, you may need to cut back on expenses a little, but I have every confidence that life is going to be just fine. Hell, even if it isn’t, I’m pretty sure that freaking out is not going to help in any way. Cool heads develop strategies for adapting to new realities.
If you don’t fit the above description, you should probably be pretty glad to see this. The shares that you’re going to continue buying (You are going to continue investing…right? right?) are now a little bit cheaper.
As of today, they’re about the same price they were 2 months ago. (See how not scary that is?) That’s a little bit of a discount and discounts are nice when you’re buying things. On the flip side, some people are freaking out about this “great buying opportunity” and joking about selling body parts to afford more shares.
Were you super excited to buy shares 2 months ago? If not, you probably shouldn’t be all that amped today either. Now, if we get back to 2014 levels, send me a message and we can talk about how much my kidneys are worth to me…
So, sure, I don’t want to see the economy suffer and people lose jobs or anything else like we saw in 2008, but the market is not the economy. It’s possible for the market to correct or even drop a whole lot and the economy to continue on being just fine. This strikes me as especially true when the stock market was just rapidly appreciating regardless of what the economy was doing at the time.
One thing you should definitely not be feeling is like you know what’s going to happen next. Is it going to plunge further? Is it going to bounce back? Is it going to do all sorts of crazy ups and downs and loop-de-loops? Or maybe just stay flat for a while? I have literally no idea. Neither do you. Anyone that says they do is lying to you and probably to themselves.
The only logical course of action is to stick with whatever investing plan and asset allocation you had already established, preferably with automatic transfers of money, and continue living your wonderful life because nothing has changed.
Finally, I’ll leave you with the most likely explanation for why this happened in the first place:
FACT: @PhysicianOnFIRE rang the NYSE closing bell on 01/30. 🛎
FACT: The S&P 500 is down 7% in the past five days. ⬇️
— Joshua Holt (@BiglawInvestor) February 5, 2018
Liz Lemon via GIPHY