Articles on investing and capital management, with a quantitative focus.

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Stocks Are Always Scary


COVID-19 certainly qualifies as a true catastrophe, but it won't be the last stock market disaster. As I pointed out a year ago, the stock market is always volatile and unpredictable.

Here's the sad truth: stocks are always scary.

One year ago, I wrote:

If you already think the stock market is scary today, just wait until it's down 30% and every headline is talking about economic collapse.

Just three months after I posted that, the coronavirus pandemic started. At its worst point, the S&P 500 was down 34% and every headline was talking about economic collapse.

Am I able to see the future? Not really. I just know, from studying stock market history, that some kind of disaster or panic happens every once in a while. In this article, I will show that these panics happen quite often. You should expect the stock market to do this kind of thing.

The last decade

For each event, I included the corresponding drop in the S&P 500 (peak to trough decline). The dates link to news articles describing the scary things.

Date Drop Scary thing
2010 May 16% Flash crash
2011 August 19% US downgrade and Euro debt crisis
2012 May 10% Euro debt crisis
2014 October 7% Global slowdown, Ebola, and ISIS
2015 August 13% China slowdown and sharp crash
2016 February 13% Oil crashing, global growth fear
2018 February 10% Sharp crash, bond market fear
2018 December 20% Rate hike and gov shutdown
2020 March 34% COVID-19 pandemic

In several of these cases, stocks had record-breaking losses!

What should an investor do?

I think it's helpful to acknowledge that stocks will always (or very often) seem scary; this is normal. The stock market is a dangerous place. A person's investment plan should be built with this in mind.

For some people, that means aggressively investing in stocks and just being aware that crashes can (and will) occur every so often.

Others, like me, prefer to invest with a lower weight in stocks so that these volatility events have less impact. I have found that this makes it easier to stick with my investment plan.

Jem Berkes