Should a Stock Market Drop Worry You?


Click on graph to see larger image. The stock market has rather large declines every year.

Click on graph to see larger image. The stock market has had rather large declines at some point in every year. 
Over the past 33 years, the U.S. stock market has been up 25 times. About 4 out of 5 years, the S&P 500 Index has been up. That is why we invest in stocks. Though during every year the market has experienced a decline of about 15%, its normal and part of the landscape, its called volatility. Don’t fear volatility, embrace it because volatility creates opportunity.

Last week, the stock market had its worst week in quite a while, including a 300 point sell off for the Dow. Is the next correction finally underway for the  market?

When people talk to me about “the market,” why is it they usually mean the U.S. large company indexes?  I guess they believe that is what they own when in reality U.S. large companies make up a minority position of their portfolio. Most of my clients should be equally concerned about the “bond market” as that makes up a substantial percentage of their portfolio.

Stock market corrections are a normal part of the cycle.  The chart above shows just how much the stock market has dropped inter-year going back over thirty years. I look at these as inter-year declines as opportunities for investors to buy in at lower prices.  The S&P 500 has not had a 10%+ correction since back in the middle of 2011, meaning that we are overdue.

The longer you have lived, the more ups and downs you have lived through. The U.S. continues to evolve; take a look below to see the turnover in the 30 companies that make up the “Dow” since 1985!  The world is changing and will continue to do so.  The long-term driver of stock prices has always been corporate earnings. Back in 1985, the earning for the S&P 500 was $15.68/share, today it is $107.45/share.  New companies will continue to evolve and be prosperous while others will fall out of favor and may cease to exist in the future (the strong survive).

October 30, 1985 – Only 10 companies remain in Dow from 1985

Allied-Signal Incorporated (formerly Allied Chemical) General Electric Company Owens-Illinois Glass
Aluminum Company of America General Motors Corporation Philip Morris Companies Inc. *
American Can Goodyear Procter & Gamble Company
American Express Company Inco Sears Roebuck & Company
American Telephone and Telegraph Company International Business Machines Texaco Incorporated
Bethlehem Steel International Harvester Union Carbide
Chevron Corporation (formerly Standard Oil of California) International Paper Company United Technologies Corporation
E. I. du Pont de Nemours and Company McDonald’s Corporation * U.S. Steel
Eastman Kodak Company Merck & Co., Inc. Westinghouse Electric
Exxon Corporation Minnesota Mining & Manufacturing Woolworth










Over the past century, U.S. stock prices have gone up by an average of 9-10%.  A woman born 87 years ago has lived long enough to see the Dow go from around 160 to nearly 16,000. Is there any way she could have known that her money invested in the market could go up over 100x during her life?  Of course not.   What if, for any reason,  the Dow did not do nearly as well for the rest of our lives?  What if it only rose 6% on average per year?There is no argument that the corporations that are moving America have changed and will continue to change.  The growth in earnings has also gone up dramatically over time and I cannot find a reason why this would not continue in the future.  I understand that it is far from a straight line up, but I want to go along for the ride and you should as well.

At 6%, the Dow would double in value in 12 years to 32,000.

In 24 years, it would be at 64,000.  In 36 years, 128,000.

Therefore, does it really matter if the Dow drops to 13,000 on its way to 50 or 100,000?

My crystal ball has never been remotely clear when it comes to predicting the next 1,000 point move of the Dow, but I am confident of the direction of the next 15,000 point move.  I just don’t know how long it will take to get there (at 8% it would take 9 years). Therefore, “time in the market” is the key rather than “timing the market.”

With all this upside potential for the U.S. stock market, I continue to emphasize a well-diversified global stock, bond, real estate and commodity combination dependent on your goals and time horizon.

Contact me if you would like to review your allocation today.

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