Why the Stock Market Plunged

Why did the stock market plunge?

A colleague on Twitter said it best:

In case you missed it, the Dow dropped 4.6% yesterday, or 1175 points. It was the worst point decline in history. But as a percentage, however, we have had 107 days worse than this one.

Today looks to continue the trend and we are now approaching a “market correction” – defined by a drop of 10% or more. On average, this happens once a year and lasts anywhere from three weeks to around three months.

In other words, events like this are completely normal.

Side note: if you own United States government Treasury bonds in your portfolio, you made money yesterday. On the worst point decline in STOCK MARKET HISTORY, you made money. You also made money in 2008-2009. This is why we use Treasury bonds in our portfolios: to help protect portfolios against falling stock prices.

Buy and Hold

Instead of trying to pinpoint the exact reason for the recent stock market volatility, I want to ask you a question:

If your investment portfolio dropped in value by 30%, what would you do?

Scratch that. Let me ask you a different question first:

If the value of your home dropped in value by 30%, what would you do?

My guess is that you wouldn’t race out to hire a realtor to list your home for sale.

That’s because you have a long-term plan in place for your home. You accepted the risks of owning real estate going in, and owning a home has an important place in your family’s financial plan. You also probably don’t want to realize a 30% loss on one of your largest assets.

So, back to my first question:

If your investment portfolio dropped in value by 30%, what would you do?

If you think you would feel inclined to run out and put your portfolio up for sale, you probably aren’t invested properly. And your portfolio probably isn’t properly aligned with your financial plan either.

There is no better time than now to confirm you have a long-term plan in place for your investment portfolio. Because the stock market will drop 30%. (I don’t know when, but it will.) On average, this happens about once every decade. And when the stock market drops 30%, it is not the time to make major changes to your investments.

Focus on What You Can Control

Stop worrying about why the market is down and where it might be headed next. Instead, focus on what you have control over in your financial life, e.g.:

  • investing properly
  • mitigating taxes
  • saving more money
  • spending less

Focusing on the above is a boring approach, but it works. And that’s what matters most: results.

To read more about our thoughts on a market crash, follow this link:

https://www.definefinancial.com/blog/stock-market-crash/

It’s frustrating to say this, but this is what markets do. Every so often, things just freak the hell out. We think, X happened, therefore, what caused X? Sometimes, X just is.

~Eddy Elfenbein