Cardboard box retirement homes & Dow Jones

The Dow Jones took a dive and a lot of people are scared about losing their retirement savings. One friend mentioned living in a cardboard box. But how scared should they be?

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Well, first of all, what is the Dow Jones? (I’m a word nerd – vocabulary is important.) The Dow Jones Industrial Average (DJIA) is a stock market index that follows the stocks of 30 companies on two other stock exchanges, the New York Stock Exchange (NYSE) and the NASDAQ. The 30 companies are large, publicly traded and American. The Dow Jones is meant to show how industry is performing in the US economy. (I could get more into the history, the composition and how the stocks are weighted, or I could just direct you to Wikipedia here.)

So what happens when it takes a dive? People get nervous. They think it’s a sign of bad things to come, and basically start selling off their stocks – they cash out while they can. That affects every other stock market in the world (rah rah globalization).

But all is not lost, folks. In fact, the effect of this dip is a lot smaller than you might think. Depending on how much time you have to recover before retirement, you’re probably fine. (Between the time of writing and posting this, it was already on the upswing!)

Turns out that while it fell by 1175 points, when you think about it as a percentage of all activity and value, it was a 4.6% decline. Yes it was “the biggest single-day point decline,” but as this article from the NY Times points out, we’ve had worse and recovered without a problem. (In 1987 it dropped by only 508 points, but that was a 22.6% drop. Ouch.)

A moment for the math – let’s say your stock market has been ticking along and has grown by 5 points. If it drops by 2 points, that’s 40% and that hurts. But if your stock market has shot off and has grown by 10 points, if it drops by 3 points, that’s 30%, which doesn’t hurt as bad.

The stock market has been doing well for a while now, so any negativity feels drastic – we’re just not used to it anymore. But 4.6% isn’t close to the 10% needed to qualify as an official market correction (when the stock market doesn’t look like the economy, so it swings to match it better).

But really, all this is talking about numbers on paper, not in real life. Unless you need your cash right now because your retirement party was yesterday and you’re hitting the road in your brand-new Winnebago tomorrow, you can relax a little. (We’ll talk about time another… er, time.)

Or at the very least, you can start looking at high-end cardboard. 😉

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