Welcome back to your work week, where chaos reigns on Wall Street. On Tuesday, May 29, the iconic and now 122-year-old Dow Jones Industrial Average (^DJI 0.16%) "plunged" 392 points to finish the session at 24,361. At one point, the closely watched index surpassed a 500-point decline during the intraday session -- and according to numerous news outlets, it was pure turmoil:
- "Italy's political chaos just made the Dow Jones plunge 472 points" -- NBC News
- "Stocks plunge on Italy's political uncertainty" -- Fox Business
- "Italian turmoil batters stocks; Dow plunges 400 points" -- Telegraph
Image source: Getty Images.
As you can probably surmise from the headlines, concerns primarily centered on Italy, where two-year bond yields have been skyrocketing in recent days. At the root of these concerns is the possibility that Italy could, like Britain, choose to leave the European Union, which some have coined as the term "Quitaly." A unified Europe is viewed as critical to ensuring the economic stability of the region and the euro, so the possibility of Italy leaving the EU certainly has some folks on Wall Street worried, as evidenced by the Dow's 392-point decline on Tuesday.
What you should know about the Dow's "big" decline
However, if investors were to take a step back and look at the bigger picture, they're liable to realize just how ordinary yesterday's move lower in the Dow actually was. Here are three things you should know about the Dow's 392-point "plunge."
1. The Dow didn't really plunge
The first thing you should know is that while the Dow may have seemed to have dropped significantly, it really didn't. Nominally, the 392-point decline in the Dow didn't crack the index's 20-largest point declines of all time, and its 1.58% move lower doesn't come even remotely close to breaking into the 20-largest percentage decline of all time. To do that, it would have needed to fall by 6.98%!
Image source: Getty Images.
Arguably, the biggest issue investors have is in adjusting their perception over time. Back in 2009, when the Dow was at nearly 6,500 points at its low, a 392-point move would have been meaningful. Today, with the Dow having nearly quadrupled from those levels, a 392-point fall isn't such a noteworthy move. It's important to adjust your perception and pay attention to the percentage moves in the Dow, and not the nominal point moves, if you're to keep a level head.
2. Corrections are normal, but short-lived
Next, investors should understand that stocks don't just move higher in a straight line. According to data from Yardeni Research, the broad-based S&P 500 (^GSPC +0.80%) has undergone 36 corrections of at least 10% since 1950, which works out to one correction about every two years. In February, we underwent our latest correction, and have, as of yet, to fully recover from it.
Yet, for as regularly as the stock market might seem to move lower, we spend far more time rallying. Added up, the S&P 500 has spent nearly three times as many days since 1950 in a bull market than in correction or a bear market.
3. A long-term outlook is a smart outlook
It's also important that investors know how insignificant a large point move in the Dow could appear over the long run.
Image source: YCharts. Yellow highlight (added by author) denotes Black Monday in October 1987.
What you see above is a 31-year chart of the Dow Jones Industrial Average. Why 31 years? I wanted to be sure to include the 508-point decline suffered by the Dow on Black Monday in October of 1987. In percentage terms, it was the biggest single-session percentage decline in the Dow's history, at 22.6%. What you'll likely notice, as evidenced by the yellow highlight, is that this decline is hardly noticeable today. In fact, the Dow's 392-point move lower isn't even visible on the Dow's long-term chart.
The point here is simple: High-quality companies tend to increase in value over time. Sure, they may not go up every day, and they may collectively hit a speed bump from time to time, but their value generally rises over the long haul. If you buy a nice mix of these high-quality companies and hold onto them for long periods of time, you should see the value of your investment(s) increase nicely.
