Recent Volatility - measurement matters

It is common to measure things in dollars and cents, yet I would suggest that when it comes to finance there are more meaningful ways to measure. This week is a good example. On Monday volatility woke from its slumber and the Dow dropped 1,175 points. In my opinion some volatility is good and more typical of how markets work, however, if you caught the news, most reports made it sound pretty frightening. Here are a few headlines:

 

“Dow Plunges 1,100 in Biggest One-Day Selloff Ever” – Fortune

“Dow plunges 1,175 – worst point decline in history” – CNBC

“Dow Drops More Than 1,100 Points in Stock-Market Rout” – Wall Street Journal

 

If you measure in terms of percentages it was a 4.6% drop, which isn’t small but doesn’t register in the top 20 largest daily drops. Let’s compare Monday’s drop to the largest percentage daily drop which occurred in 1987.

 

Date                Point Change  % Change        Closing Price

02/5/2018       -1,175              -4.6%               24,345.75

10/19/1987     -508                 -22.61%           1,738.74         

 

Note, the comparison of the closing prices illustrates the benefit of investing in the stock market over the long run. If you had $10,000 invested in the Dow in October of 1987 and left it there while reinvesting dividends, it would be worth about $240,000 today.

 

As you watch your portfolio, the dollar amount provides a quick measurement and is a way to set goals and meet milestones, however, it is limited in terms of the information it can provide. Ultimately, it’s more important to know if your investments are properly structured to meet your financial goals. Information alone often doesn’t tell the whole story but presented in the right way it can help you make meaningful and wise decisions.

 

An investor cannot invest directly in an index. Past performance does not guarantee future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.

 

 

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