By Paul Morrone, CFP ®, CPA, MSA
We’ve seen a lot about the Dow lately, and that’s largely because of the 20,000 milestone that the index just surpassed not that long ago. Since the ’08-‘09 crash, the nominal value of a 500 ‘point’ swing in the Dow varies so greatly that it is almost meaningless to refer to. Today, as we hover around the 20,000 mark, a 500 point change could mean a market value increase or decrease of about 2.5%. Most investors would likely not blink an eye with a change of this magnitude, as we have learned to accept this level of volatility as part of the risk/reward of investing in equities. While this could be considered a good day, assuming the market rises, or a bad day, if it falls, most people would agree that a 500 point swing does not constitute an unusually good or unusually bad day, at least on a percentage basis.
With the math out of the way, let’s rewind to October 19, 1987. This is a date most people remember. I, however, remember this as my date of birth. Well I guess I don’t actually remember it, but I’ve heard it was quite the day that I entered this wonderful world. In this case, I am not most people. Most everyone else remembers this day as Black Monday when the Dow fell 508 points, from 2,247 to 1,739 in a single trading session. Based upon today’s index values this would not even be worth writing about, however in 1987 this was the biggest news to hit financial markets in nearly a decade. Those 508 points caused hysteria as the market plummeted nearly 23% (22.61% to be exact), almost 10 times the impact that we would feel today from the same 508 point movement.
While this is an obvious and dramatic example about the impact of price swings in the market, it does point out how the context of history and time play into our everyday lives. As index values continue to rise in the future, there will undoubtedly be large price swings that occur as well. A 1,000 point drop in the Dow is not out of the question, and while that may seem cataclysmic, it may be simply another bump in the road.