Let’s Step Back for a Moment…

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Today marks a notorious day in stock market history. On this day 1932 the Dow Jones Industrial Average closed at 41.22.

 

What’s so special about that?

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That close at 41.22 represented a decline of nearly 90% – 89.18% to be exact – in the general stock market. The decline wiped out 36 years of stock market gains.

What would such an event look like today?

The front page of the Washington Post September 18th, 2008. There was still another 6 months of stock market declines.

The front page of the Washington Post September 18th, 2008. There was still another 6 months of stock market declines.

 

A 90% decline today would drop the Dow Jones Industrial Average to just over 2,000 and the S&P 500 to about 240.

 

I can’t imagine. We investors have been spoiled since 2009; we are in the second longest bull market in history (according to Fortune), and just had the 7th longest stretch of days without a 1% move in the S&P 500 in history (according to MarketWatch).

 

Even the event that still haunts us, the “great recession” of 2008 and 2009 was “only” a decline of 45%. 1932 was that and then a 62% decline from there!

 

I think it is an important reminder of what you may be getting yourself into when you invest in the stock market. It’s easy to think about the immense gains the stock market can provide, but keep in mind the potential for gloomy years as well.

 

Because how you act in times like 1932, 1999 or 2009 will make all the difference. Your behavior is more important than anything else. No matter how you divvy up your asset allocation, no matter how low you get the expense ratios of your funds or who your broker is, you can wreck everything with just a moment of irrationality. Let the animal spirits take over during the booms and you have no chance to weather the storm. Panic and sell at the bottom and you have nothing left to take part in the rebound.

 

It took the stock market until November 23rd, 1954 to recover to its 1929 highs – 25 years! An event is not impossible today. Keep that in the back of your mind and you should be alright.

 

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