A while back, a Foolish reader asked, "Is it just me, or is it weird that the media always refers to moves in the market by total points, and not by percentages? Wouldn't percentages be better?"
It's not just you, Fool. At Fool HQ, we often shake our heads in bemusement at reporters who exclaim, "The Dow was up 100 points today!" After all, the percentages really matter most.
For much of the year 2000, the Dow Jones Industrial Average, which represents the common stock of 30 blue-chip companies, hovered around 10,000. On March 16 of that year, it rocketed up 499 points, a 5% move. Compare this with 1987, though, when the Dow stood around 2,247 before plunging 508 points in a single day -- a whopping 23% move.
The moves involved a similar number of points but vastly different percentages. As the Dow heads into ever-higher territory in the future, 500-point drops or pops will become more common and less meaningful. Be prepared for bigger numbers, too. When the Dow is at 20,000, a 5% fall will involve 1,000 points.
The next time you see a TV anchor gravely report that "The Dow fell 60 points in heavy trading today," put that number into perspective. If the Dow is around 12,000 at the time, dividing 60 by 12,000 gets you 0.005, or just half a percentage point. Back in 1956, when the Dow was at 500, it would have been a 12% move. In 1906, with the Dow at a mere 100, it would have been an eye-popping 60% free-fall. But today, 0.5% shouldn't really be news.
A sudden drop can certainly be the beginning of a long slump, as it was in 1929. But its effect is frequently reversed within a matter of months. One of the biggest point drops in Dow history occurred on Oct. 27, 1997, when the Dow fell 554 points. It regained lost ground within a matter of days.
A final point to remember is that occasional big drops are to be expected, but you needn't reach for the antacid if you're planning to remain invested in the market for decades. Trust in the long-term upward trend of the market, look for bargains amid downturns, and focus on percentages rather than points.
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