NY Dow drops over $1,800: 3 things to review on a morning of sharp decline
When I opened the news on my smartphone this morning, the NY Dow had fallen significantly.
On the New York Stock Exchange on November 5, the Dow Jones Industrial Average fell by more than $1,800 at one point. According to reports, the opposition Democratic Party won big in the U.S. midterm elections, further intensifying concerns about the future of AI (artificial intelligence).
Selling spread mainly among high-tech stocks, with enough momentum to wipe out the previous day’s $1,569 gain.
I will look at how to interpret the numbers and how to think about checking your assets in order.
How to interpret the $1,800 figure
Hearing “$1,800” feels like a large drop. However, in index news, the dollar amount alone does not convey the severity. What you should look at is the “percentage decline.”
The higher the level of an index, the smaller the percentage for the same dollar amount.
In this report, the percentage decline could not be confirmed. Both the dollar amount and the percentage can be checked on the market pages of securities companies and news outlets.
The market has moved by more than $1,500 for two consecutive days. It is in a state where it is prone to large swings both up and down.
How much of the cause can be verified?
The reported factors are the results of the midterm elections and concerns about the future of AI.
The reasons for price movements are often explained after the fact. There are times when multiple factors overlap, so it cannot be attributed to a single reason.
The report states that concerns have “further intensified.” This means that concerns about AI were already present in the market.
Sectors where expectations have grown significantly are easily sold off even on small negative news. While prices are supported by expectations, price movements become larger when those expectations waver.
Selling in high-tech stocks also has a strong impact on the index. The Dow is an index calculated based on the stock prices of 30 companies, and the higher the stock price of a company, the greater its impact on the index.
Which way it will move next cannot be determined from this news.
Three things to check on a morning of a sharp decline
You cannot control the market itself. You can, however, check your own conditions. There are three points to confirm.
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Is the money you are currently investing money that you do not plan to use for several years?
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Do you have several months’ worth of living expenses in a separate savings account from your investments?
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Are you trying to change your investment amount or frequency based on the momentum of the news?
The first two points are checks to avoid a situation where you ‘need cash immediately’ during a downturn. If you run out of living expenses and are forced to sell while prices are falling, that is the most painful scenario.
The third point is to confirm whether you are following your established rules. If you rush to make new decisions on a day of a sharp decline, you are more likely to deviate from your set rules.
Long-term investment and the true nature of ‘unrealized losses’
Long-term investment assumes that price declines will occur. Assets with small price fluctuations are reassuring, but they also have less room for significant growth.
In accumulation investment, you can buy more units for the same amount of money in months when prices fall. This mechanism is called ‘dollar-cost averaging’.
The red numbers on your screen on a day of a sharp decline are, in many cases, ‘unrealized losses.’ A state where the valuation has simply dropped is called an unrealized loss, while a loss that is confirmed by selling is called a ‘realized loss’ to distinguish the two.Even if the negative number is the same, the meaning changes depending on whether it has been realized.
However, accumulation investment is not a mechanism that promises a recovery after a decline.
Daily fluctuations and movements over several years should be viewed on different time scales. If you check whether you can withstand a one-day sharp decline before it happens, your judgment will be less likely to waver.
Summary
Before looking at the numbers in the news, checking if you have savings for living expenses will help you stay calm on the morning of a sharp decline.