The Day the Market Went Down Quite a Bit

Today seems like a day that will go down in infamy. From a statistical standpoint, these types of days are indeed extremely rare. Stock prices dwindled across the global marketplace. The S&P 500 was down 0ver 106 points or -8.77%, which is the second largest 1-day drop in value (behind October 19th, 1987) since 1950. Can anyone remember the day that has just been pushed down to 3rd place?

I think we already have a fair amount of insight into some of the root causes of this current economic downturn, and it has everything to do with many groups of people miscalculating risk. Government agencies were slow to raise concern about the lack of regulation and oversight on the Credit Default Swap (CDS) market. It is their job to make sure there are rules of the road and that they are adhered to, so we don't have a situation where markets could potentially collapse. Many investment banks are now going under or selling at a fraction of their recent value because they were stuck with toxic securities on their books. They were unable or unwilling to accurately ascertain the risks of these securities if (and as it turns out, when) the market for them evaporated. And there are hundreds of thousands of American people who did not adequately assess the risks of getting into sub-prime home loans. They didn't envision what would happen if their property values decreased, their variable rates went up and their cost of living went up faster than their paycheck.

This is not to point fingers. I'm just pointing out the common thread that this most recent economic downturn is a result of a gross underestimation of risk at virtually every level. Too many people had their eye on the potential rewards, that the consequences of the risks being taken essentially became invisible.

The good thing is that tortoise investors don't put themselves in a position to be sent to the poor house over night. They also know that accumulating wealth for a successful retirement doesn't happen over night either.

One can look at today and think the sky is falling and that the losses are unrecoverable, but that's really a short-term knee-jerk reaction. I'm not trying to make light of the situation....it's certainly been painful, but I am trying to put it into perspective.

Tortoise investors make decisions based on decades of data, not short periods of high volatility. They realize that they are going to be invested in the market continuously over long periods of time. Looking all the way back to 1927, there is not one 20-year period where the annualized returns of the U.S. Total Stock Market Index were negative. Even the 20-year period starting in 1929 had an annualized return of 3%, and the 30-year period starting in 1929 had an anualized return of 7.7%.....and obviously those periods contain the worst span of performance we have seen yet.

There are two important take-aways from this post: 1. Know the risks you take. Really try to understand the potential downside of any investment. 2. Tortoise investors don't sweat the short-term. It's not that they don't care, it's just that they know better.