When you saw headlines shouting “DOW LOSES 1,175 POINTS IN BIGGEST SINGLE-DAY DROP IN HISTORY!!”, how did you feel?
If you are like most investors, it scared you. But if you take this advice to heart, you will be one of the smartest and calmest investors around:
From now on, whenever you hear news about “the number of points the Dow went down (or up)”… ignore it. You don’t care about points anymore. You care about percentages.
Quiz:
Q: What the single-biggest one-day loss was for the Dow?
A: 22.6% (“Black Monday” on Oct. 19, 1987)
Q: How may points was that?
A: 508
Q: What was the second-worst?
A: 12.8% (Oct. 28, 1929)
Q: How many points was that?
A: 38
Why were headlines screaming “1,175 point drop!” not just irrelevant but also harmful? Take a look at the Dow. It’s over 24,000. That “massive” drop of 1,175 was a little over 4.5%. It’s significant, but it doesn’t even make it into the top 20 list.
My point:
- Headlines like that might inform and frighten, but they do not enlighten.
- Frightened investors make mistakes.
- Enlightened investors make money.
If you are interested, here is a chart from Wikipedia listing the 20 biggest single-day percentage losses:
