Red Letter Day

February 28, 2007

Yesterday's Dow drop leave you jittery? Relax. This too will pass (and in fact the Dow, as of 12:28 PM EST, has already bounced back a bit today). Chuck Jaffe at MarketWatch puts it in perspective:

If the stock market's big decline Tuesday made you nervous, try the following: Take a red marker and make a big X on Feb. 27 in your calendar. Make no other marks or notations. Then go about your regular business for the next 10 months.

When the end of the year rolls around -- assuming you review your calendar before you either file it or toss it -- see if you remember why you actually made Tuesday a red-letter day.

Chances are the 416-point decline in the Dow Jones Industrial Average will pass, just like so many others before it. And what investors need to keep in mind is that there have been many others; while Tuesday's drop represents the seventh-largest point drop in Dow history, at 3.27% it is just the 37th-largest percentage decline day since 1950. In percentage terms, if you go back to 1900, you'd have another 200 days where the Dow suffered bigger losses.

...The point of marking the calendar is that virtually every big market drop becomes routine in time. Nearly 20 years after the market crash of 1987, for example, there is not a crowd of people claiming that they would be able to retire today, rather than working a few years past age 65, if they had only been out of the market on that particularly bad day. The market plunged more than 22% on Oct. 19, 1987."

LINK

We do think that yesterday's drop does mark the end of higher risk or alternative investments beating more traditional ones. From here on out we predict the S&P 500 will outperform emerging markets like China.

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