Trader Talk

Trader Talk: Are you ready for a 2,000 point drop in the Dow?

This is what a 10-percent correction looks like now

Are you ready for a 2,000 point drop in the Dow? That's what a "normal" correction would look like now.

Normal corrections look kind of scary when markets are at these highs.

The Dow hit a new high on March 1 at 21,115.

That means a 10 percent drop — what would be considered a "correction" — would be a decline of 2,111 points. Sounds pretty steep, no?

Here's an even bigger drop: 3,000 points. Dan Wiener, who runs the Independent Adviser for Vanguard Investors and runs money as president of Adviser Investments, pointed out to clients that over the past 30 years the stock market has declined an average of 14.3 percent from high to low on an intrayear basis.

That translates into a 3,019-point decline from the Dow's March 1 top.

Finally, here's an illustration of the power of staying in the market, not trying to time investing, and the beauty of compounding interest. March 9 was the eighth anniversary of the bottom of the market. It was widely noted that the S&P 500 was up over almost 250 percent since then.

Here's an even more interesting tidbit: It's up about 310 percent when dividends are accounted for.

That's the power of compounded interest! That's about a 19 percent annual compounded gain every year for eight years.

Think about that. Your money would be up an average of almost 20 percent a year when dividends are included and the money is reinvested over the last eight years. That is a remarkable run. Can stocks gain 20 percent a year for the next eight years? Maybe, but it's unlikely: "[Y]ou need to keep your expectations in check," Wiener said.

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