How Low Can It Go? Part 2

I’m sure you already know the stock market had a good drop since 2008 began. It’s time to update the table I did last August on the greater-than-10% stock market declines in the last 20 years. When I did the table last time, the market made a bottom on the same day. Let’s see if I can make it do it again this time.

Date Change Duration Next Leg
10/07 – ??? -16% 3.5 months and counting ???
7/07 – 8/07 -9% 4 weeks +11%
11/02 – 3/03 -15% 3.5 months +94%
3/00 – 10/02 -48% 2.5 years +21%
7/99 – 10/99 -12% 3 months +22%
9/98 – 10/98 -10% 2 weeks +48%
7/98 – 8/98 -19% 6 weeks +11%
10/97 – 10/97 -10% 2 weeks +35%
2/97 – 4/97 -10% 7 weeks +33%
7/90 – 10/90 -20% 3 months +176%
1/90 – 1/90 -10% 4 weeks +14%
8/87 – 12/87 -34% 3.5 months +61%

The common definition for a stock market correction is a 10% drop. A 20% drop makes it a bear market. Based on the S&P 500 data, the decline last summer didn’t even qualify as a correction. The market reversed course after going down only 9% and then went over its previous high, for a few days. Since October 2007, the market has dropped 16%. So it now crossed the correction mark, going half way toward the bear market. It may or may not get there though. Just like last year it looked like it was going toward a correction but it never made it. With the exception of the 2000 – 2002 dot com bear market, no other decline in the last 20 years lasted much longer than the correction we are currently in.

I have been pumping cash into stocks in keeping up with my asset allocation. With the speed it’s dropping, it’s hard to keep up. I’ve added more to stocks in less than one month in 2008 than I did in the entire year of 2007. It’s nerve-racking when you buy something one day and see it worth less immediately the next day. You can’t help but wonder why you just threw money down the drain. But I’d rather buy at lower and lower prices than buying at higher and higher prices. Here’s a quote from Warren Buffett in his Letter to Shareholders, 1997:

“A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

“But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

I will be a net saver for the foreseeable future. I find myself pretty happy lately.

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  1. Kristin says

    I continue to add as well through DCA. Tuesday is going to be brutal in the markets – maybe that will be the big wash out and the healing can begin!

  2. indexfundfan says

    This is a very good timely reminder to stay the course. Tomorrow looks to be ugly — and I will probably be exchanging some of my bond funds for equity funds.

  3. Anonymous says

    boy… down yet again today. This is gut check time. Those are some great figures, though, to remember that this too shall past as it always has before.

  4. Harry Sit says

    Anon, DJIA was down 200 points in the morning when you posted your comments. At the end of the day, it was UP 300 points. What a day!

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