Archives For February 2014

Scary Parallel

Almost everyone recognizes the worst stock market decline as the 1929 crash.  It was during that time that the Dow Jones Industrial Average declined approximately 87%.  To describe it as a devastating time would be an understatement as The Great Depression was soon ushered in.

It has been said that history repeats itself.  If that is true, then the accompanying chart which has received a great deal of publicity of late, gives reason to be concerned.  The dark gray up-and-down line on the chart is the history of the Dow Jones from 1928-1929, while the red line is the Dow’s current performance.

As explained in a post by Mark Hulbert (http://www.marketwatch.com/story/scary-1929-market-chart-gains-traction-2014-02-11), there are some problems with the comparisons.  The biggest problem is the scaling of the charts and percentage of rise of the two lines, and whether or not there is actual correlation.  If the red line were to play out as merely a rhyme of the 1929 line and not an exact repeat, then we may see a significant decline in the market.

Whether market history repeats itself, or whether the market continues to climb from here is not the point of this post.  The point is that everyone should have a game plan for what they will do if the market does begin to go down.  From a mathematical point-of-view, losses are hard to make up, and the greater the loss, the more difficult the recovery.