Beware hysteria of headlines

Max Osbon - September 10, 2013

I definitely agree with the old adage that kids say the darnedest things.  But now and then the financial media give kids a good run for their money. For instance, we’ve all seen headlines like this one: “Dow Plummets 150 Points.”  But is 150 points really a plummet? Let’s look at the stats.

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With the Dow Jones Industrial Average hovering around 15,000 in recent months, a drop of 150 points constitutes all of one percent of its value. Yes, we all agree that having a dollar is better than having 99 cents, but the difference is really tough to notice. It’s like standing on a ream of paper and having 5 sheets yanked out from underneath you. Imagine the drama and danger!

Hyperbolic headlines may help to sell newspapers and online ads, but they don’t help investors maintain clear perspective on what is really going on. By using words like “plummet’ and “plunge” rather than “dip” or “slip,” reporters and editors can stir emotional responses that are far out of proportion to the facts.

Keeping perspective

In reality, a single drop of one percent is not a big move in equity markets where we expect to see continual price movement in response to economic data, earnings reports and other data.

And it’s not uncommon either.

In the 15-½ year history of DIA, an ETF that tracks the Dow Industrials, daily losses of one percent or more have occurred 570 times in just under 4000 trading days. That’s about once every seven sessions. In 2013, a decidedly up year, DIA has logged eight “plummets” of one percent or more so far, about one a month.

Investors who pay attention to daily market results likely recognize that one percent declines are not uncommon. They may also realize that one percent gains happen quite often as well. DIA has experienced 593 such increases in 15+ years.

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Think decades, not days

Much more important than daily price movements – we encourage clients to completely ignore all daily data and related commentary – is long-term performance. Even with all its volatility through the great recession, DIA is up 160% percent since it launched in 1998. All the down days (historically the market falls about 46 percent of days) have been cancelled out by more and bigger up days.

Unfortunately, that’s not the kind of news that makes for exciting headlines.

 


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