Financial Frontlines®

Here we go again!

As of 10:40 AM today, the Dow Jones Industrial Average (DJIA) was off over 400 points, dropping through the psychologically important 10,000 point barrier and adding fuel to the “panic” fire.  At a kid’s birthday party this weekend, I overheard two parents talking and the gist of the conversation was they felt their stock market holdings in their respective 401(k) plans were going to go to ZERO…a complete loss…even though they were in well-diversified mutual funds.  Their solution?

Sell.

Even though they are in their mid-40s and have years to go before retirement.  Perhaps a bit of historical perspective is in order.

Last week’s drop of 777 points on September 29, 2008 was big…from a raw point level.  It dropped the DJIA down to 10,365 points.  However, as a percentage drop of about 6.9 percent, it didn’t even break the top 10 (not that you would have known that if you listened to the nightly news shows).  Compare that to the infamous “Black Monday” drop on October 19, 1987, when the DJIA dropped 508 points or a staggering 22.6 percent!

A drop comparable to the October 1987 drop would have sent the DJIA down a whopping 2,545 points or all the way down to 8,597 points.

Now, that doesn’t mean the things aren’t serious in the market today and that we shouldn’t be concerned…but even with today’s interday drop…the DJIA is still nearly 6 times higher today, 21 years later, than it was after the 1987 crash.  So where will your money be in 21 years?

If you pull your long-term money out and move it to cash, you do two things: (1) You guarantee yourself a 25% loss and (2) at 3 percent a year, it will take 24 years to double your money in cash.

Something to think about…

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