Panic in the Street (Wall, That Is)

As measured by the Dow Jones Wilshire 5000 Composite Index, the price of U.S. stocks has declined about 45 percent from the peak of about a year ago. That drop rivals the crash of 1929, when the value of the Dow Jones Industrial Average lost 48 percent of its value from the peak on September 1 to an initial bottom on November 13. (After recovering for a while, the Dow continued to slide, reaching its final bottom on July 8, 1932 — 89 percent below its peak value.)

My objective isn’t to spread panic but, rather, to chastise those who sell in panic. The resources that produce real goods and services haven’t vanished suddenly; the economies of the U.S. and other developed countries can still produce all that they have been producing; and they can continue to grow as they have done for centuries and millenia.

In sum, the current panic has nothing to do with the state of the “real” economy. It is an over-reaction to a credit “crunch” that involves a relatively small portion of the world’s financial markets. Those who sell stocks in the current panic will, in a few months or years, regret having done so as credit markets stabilize and the economy returns to full production and normal growth.

If you are ready to panic, just take a deep breath and consider the big picture:

And just remember this: You haven’t lost money in the stock market until you actually sell stock for less than your purchase price. Up to that point the quoted price of a stock is nothing more than a guess as to its current value. Sure, you can sell at a loss and (maybe) claim the loss as a deduction on your tax return, but the value of a deduction is always less (usually far less) than the loss. And you can sell at a loss and put the money into something else — like a 3-percent savings account (whoopee!) — and then miss the turnaround in stock prices.