A reader asks, "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?"
Our answer: It's not just you. At Fool HQ, we often shake our heads in bemusement at reporters who exclaim, "The Dow was up 100 points today!" We're dismayed because it's the percentages that really matter.
For much of the year 2000, the Dow Jones Industrial Average (which is made up of the stock of 30 blue-chip companies) hovered around 10,000. On March 16, it rocketed up 499 points, which was a 5% move. Compare this with 1987, though, when the Dow stood at around 2,247 before plunging 508 points in a single day. That represented a whopping 23% move. 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 mean 1,000 points.
Next time you see a TV anchor report (with a grave expression) that "The Dow fell 50 points in heavy trading today," put that number in perspective. If the Dow is around 10,000 at the time, divide 50 by 10,000 and you'll get 0.005, or just half a percentage point. Back in 1956, when the Dow was at 500, it would have been a 10% move. In 1906, with the Dow at a mere 100, it would have been an eye-popping 50% freefall. But today, 0.5% isn't really news.
A sudden drop can certainly be the beginning of a long slump, such as in 1929. But its effect is frequently reversed within a matter of months. One of the biggest point drops in Dow history occurred in 1997, when the Dow fell 554 points on Oct. 27. It regained its lost ground within a matter of days. That said, the stock market can certainly also continue falling a bit, or it can remain in a slump for quite a while.
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.To learn more about investing Foolishly, visit our Fool's School and our Investing Basics area. Or check out some of our inexpensive and well-regarded online how-to guides, which come with money-back guarantees. You can also learn all about brokerages and find one that's right for you by visiting our Broker Center. (Did you know that some well-regarded brokerages are offering commissions as low as $5?)
