CapitalTime
Articles on investing and capital management, with a quantitative focus.
Stocks Are Always Scary
2020-11-22
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