The Sky Is Falling (maybe) – And That’s OK (probably)

Did you notice the stock market dropped quite a bit yesterday?  Some of the news outlets were saying the Dow dropped by the 3rd highest amount in its entire history and we are heading for a market correction!

A market correction is when an index falls 10% from a recent high.

If you weren’t scared enough, now half of the largest 10 market declines have occurred in 2018!  Are you shaking in your boots yet?  Just look at this scary chart:

Market Correction
Source

Put It Into Perspective

The Dow has grown quite a bit over the last decade.  An 831 point drop sounds scarier than what the drop actually represents, which is a 3.15% drop.  A full 1.5% and 1% less of a drop than we experienced on February 5th and February 8th of this year (4.6% and 4.15% respectively.)

So from a total market perspective, how does yesterday’s drop compare?

The non-salacious answer is that it doesn’t even crack the top 20 for biggest single day percent declines:

Market Correction
Source

So How Much Further Will It Fall?

If I knew, I would make a lot of money.  Nobody knows how much the market will drop, how long it will drop, or when it will (probably) recover.  What we do know, based on history, is that an S&P market correction occurs about every 1-2 years on average.  The last one occurred earlier this year in February and lasted 13 days.  With the drop yesterday and several days in a row of declines, the S&P would need to drop another 4-5% to enter into “correction”.

What If It Keeps Falling?

The next named point would be a 20% decline from a recent high, that is called a Bear Market.  If the S&P drops to ~2,344 we would be in a bear market.  Falling another 10% (30% overall from the recent high) would put the market in Recession territory.  If the S&P falls to ~2,051 we would be in a recession.  The last time the S&P was that low was in late June 2016.  The most important thing to remember is that money is only lost if you sell.  Otherwise, the market will recover over time.

How Long Will It Last?

Again – nobody knows.  However, we can look back at recent corrections, bear markets and recessions on how long the market took to recover:

Market Correction
The average correction time since 1950 is 196 days.  Source

Just remember that we aren’t in a correction (yet?)  But it is important to know what you should do if the market does keep declining.

What to do all depends on where you are in your financial journey.  Because I have a longer horizon until I need to start drawing from my retirement accounts, I will stand pat.  My weekly contributions will purchase more shares of my funds for the same amount of money.  I consider a market correction, bear market, and recession as a blue light special on my favorite ETFs.

If you are at a point in your life that you are actively withdrawing from your accounts for income, just keep an eye on how much you are withdrawing.  Try to remember that all of those simulations that you ran to get to your number revolved around scenarios in which the market went through several corrections.  If you are still concerned, develop a plan on how to change your withdrawals in the event of a long term declining market.

Final Takeaway

Stock market drops are scary, I know.  The first thing I did this morning was check my paper losses in my Roth IRA (~$850) and my 401k (~$4,400.)  The next thing I did was – nothing.  I’m not a short term trader, and I’m guessing that most people in the FI/RE community aren’t either.  The best thing we can do is take a deep breath, realize that the sky is not falling (yet) like a lot of news organizations would like you to believe.  And be comfortable in the fact that the best thing we can do is exactly the same thing we have been doing – diligently saving and investing.

I’ve got 4,281 days until I plan on hitting my goal of a $1,000,000 retirement account.  No doubt I am going to experience market corrections, bears and maybe (probably) a recession on my journey.  I can sleep well at night because my plan is solid and factored in that the market would experience these types of events.

So fear not – this too shall pass (eventually… probably.)

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