Market Plunge? You've Got to Be Kidding Me

Reacting to a CNBC segment title that read "Dow Chart Shows Risk of 'Sudden Death,'" my fellow Fool Morgan Housel tweeted: "Bull market in hyperbole."

Brilliantly put.

It seems that even after a zippy bull surge that took the S&P 500 up nearly 12% through the first quarter of the year, the media is more than ready to encourage investors to scurry to stock market bomb shelters at the first whiffs of selling. Check out these choice headlines from the past few days:

  • "Stock Futures Plunge on Weak Jobs News" (

  • "U.S. Stocks Take Another Plunge" (The Washington Post)

  • "U.S. Stock Futures Plunge on Jobs Report" (SmartMoney)

  • "Gary Shilling: Profits Will Plummet and Stocks Will Plunge 43%" (Business Insider)

  • "Market Plunges for Fifth Consecutive Loss" (

Even the Fool published an article yesterday titled "What's Coming After the Plunge?"

So what was the result of this insane carnage that decimated investors over the harrowing stretch of declines?

Wait, what? I don't think I heard you right. Did you say 4%? And after the fifth day of declines the Dow Jones Industrial Average (INDEX: ^DJI) was still up more than 4% and the S&P was still up 8% year to date?

Trader, please.

Can we get some perspective already?
OK, I'll concede this much: After a few months of seeming nonstop gains for stocks across the board, a few days of losses felt a bit like a splash of cold water. But it was hardly the gory stock market rout that many media outlets were painting it as.

This kind of emotional prodding for investors can be very troublesome. As it is, the emotional element of investing is consistently one of the, if not the, most challenging. Value investing legend Ben Graham said, "The investor's chief problem -- and even his worst enemy -- is likely to be himself."

If a 4.3% drop has you ripping out your hair in handfuls, then actively managing your own investments is likely to leave you with a scarred portfolio, an ulcer, or both. Over the past decade there have been 49 separate five-day stretches (that is, once a five-day stretch is established, the sixth day isn't counted) with declines of more than 4.3%. That's nearly five such dips every year.

And even over a short five-day period, a 4.3% decline is child's play. We don't have to go back far at all to find markedly worse drops (based on the S&P 500):

  • -6.1% (Nov. 16, 2011-Nov. 23, 2011)

  • -6.6% (Sept. 15, 2011-Sept. 22, 2011)

  • -6.7% (Aug. 15, 2011-Aug. 22, 2011)

  • -13% (Aug. 1, 2011-Aug. 8, 2011)

Interesting point of note: If you'd invested at the maximum point of pessimism during that 13% dip, you'd currently be sitting on a 22% gain from the past eight months -- even with the big "plunge" of the past week.

A little help in the delicate art of shooting yourself in the foot
Believe it or not, the financial press doesn't always have your best interest in mind when concocting headlines. At the end of the day, they are incentivized as businesses and want to get readers to click on their headlines or pick up their paper at the newsstand.

Hyperbolic coverage of market movements isn't without its consequences, though, particularly when it encourages investors to believe that they need to be constantly taking action. In 2000, University of California professors Brad Barber and Terrance Odean released a paper titled "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors" (link opens PDF file). After studying 66,465 household brokerage accounts over a five-year period, the duo found out what the title blatantly gives away -- those investors who trade the most tend to perform the worst.

Over the stretch that Barber and Odean studied, the market returned 17.9%, the average household earned 16.4%, and the group that traded the most averaged 11.4% returns. They sum it up: "Our central message is that trading is hazardous to your wealth."

By the transitive property, we could say that to the extent that it encourages you to trade, the financial media is hazardous to your wealth as well.

If you must react
It may be a little cliche to say that market drops put stocks on sale, but goshdarnit if it's not true. At least much of the time.

During the five-day "plunge," Walgreen's (NYS: WAG) and 3M's (NYS: MMM) stocks fell 5.7% and 5.2%, respectively. These are the kinds of companies that -- thanks to great underlying businesses, stable histories of financial performance, and solid dividends -- should be on almost every investor's watchlist. For bargain shoppers, a 5% decline in a stock price means a $50 discount for each $1,000 in shares purchased -- and that's real money.

So if you find yourself itching to do something when the media starts playing Chicken Little during a little market indigestion, pop a few Tums and see if there aren't some high-quality stocks that have been put on sale.

If you want a few more ideas on great stocks to keep your eye on, check out The Motley Fool's special report: "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can grab a free copy by clicking here.

At the time thisarticle was published Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in 3M. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

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