"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.
While so many focus on Black Monday and the 23% decline, they fail to mention how 1987 ended. The Dow, assuming reinvested 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 stocks on that fateful day, locking in their losses. Had they 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. You're more likely to experience inferior returns in attempts to time the market than if you 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 period, your annualized return drops to 4.53%. Keep in mind, 25 days over this period represents 0.37% of the entire available trading days (using an average of 251 trading days annually). Do you trust a timing system to predict these unknowns accurately?
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 end of September 2018, is up +2766%, assuming reinvested dividends. No timing needed!
Anytime there’s uncertainty surrounding your money, it can be scary. At RCS Financial Planning, we've seen a lot of difficult markets come and go. And we can certainly empathize with people who find the current environment troublesome and disturbing. We'd like to help, if we can, and to that end, here's what we offer:
A cup of coffee, and a second opinion.
By appointment, you're welcome to meet virtually or over the phone with us. We'll ask you to outline your financial goals – what your investment portfolio is intended to do for you. Then we'll review the portfolio for and with you.
If we think your investments continue to be well-suited to your long-term goals – in spite of the current market turmoil – we'll gladly tell you so, and send you on your way. If, on the other hand, we think some of your investments no longer fit with your goals, we'll explain why, in plain English. And, if you like, we'll recommend some alternatives.