Are We Headed For a Market Crash?

Ted Toal, CFP®

"On Black Monday, 31 years from last Friday, the Dow Jones Industrial Average fell about 23%. If the same percentage drop were to happen today, it would be about 5,700 points. I lost millions that day, and so did many others. Of course, today is not 1987."

That's the first paragraph from an article on a major financial news site. Scary, isn't it?

For those unaware, "Black Monday" refers to the date of October 19, 1987. The Dow Jones Industrial average fell 508 points, which was a -22.61% decline. That same decline today is about 5,700 points off of the Dow.

The author admits he and many others "lost millions" on Black Monday. I mean, how could you not lose a lot of money when the market falls 23% in one trading day? The author then explains why today's market resembles 1987. His advice? Market timing, of course! This guy lost millions and is now much smarter, so we should listen to him, right?

Wrong!

While so many focus on Black Monday and the 23% decline, they fail to mention how 1987 ended. The Dow, assuming re-invested dividends, finished that year +2.44%. You read that right, the Dow had a positive return for the year.

Therefore, my question is, how did this guy lose millions when the market finished positive for the year? The answer is…rather than sticking to a reliable strategy, he reacted to his emotions.

Our emotions around money are powerful. Many people decided to sell their stock on that fateful day, locking in their losses. Had they simply done nothing they could have achieved a positive return that year.

I'm purposely excluding the link to the referenced article because the author has one motivation, and that is to sell subscriptions to the many market timing products he offers. Timing services are an easy sell during volatile markets because of our emotions. We want to believe timing is possible so that we can enjoy market returns without the downside risk.

However, timing the market is impossible. Countless individuals have tried and no one has successfully found a consistent system for timing the market. In fact, you're more likely to experience inferior returns in attempts to time the market than if you simply buy and hold and accept market risk. As an example, the S&P 500 returned 9.81% annualized from 1990 through 2017. However, if you missed the 25 best single performance days over this time period, your annualized return drops to 4.53%. Keep in mind, 25 days over this time period represents 0.37% of the entire available trading days (using an average 251 trading days annually). Do you really trust a timing system to accurately predict these unknowns?

Separately, when did it become acceptable for our major news outlets to position sensational advertisement as educational content? This article failed to mention the Dow Jones, from January 1, 1987 through the endof September 2018, is up +2766%, assuming re-invested dividends. No timing needed!

RCS will always strive to provide clarity and calm, particularly during seasons of market turmoil. Have you read something that keeps you up at night? Let’s talk

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