That’s true even when it’s caused by something as awful as the U.S. being attacked, as it was 14 years ago today. It’s important to remember that, since it’s inevitable that this country again will fall victim to a terrorist attack sometime in the future.
Consider an impetuous investor who unloaded his shares in the wake of the 9/11 attack. At the stock market’s low five trading sessions later, the Dow Jones Industrial Average had fallen 17.5% from the close Sept. 10. The Dow Jones Transportation Average, some of whose components were from the decimated airline industry, had tumbled 27.5%.
Yet the stock market quickly recovered. The Dow Industrials, by early November, was trading higher than where it had been the day before the attacks, as you can see from the chart above. The Dow Transports took a bit longer - Jan. 3, 2002.
A lucky break in otherwise dark times?
Perhaps not. Take what happened after Pearl Harbor, the occasion prior to 9/11 when there was a large-scale attack on U.S. soil. Within less than a month, the Dow had battled back to within 1.4 percentage points of where it had closed the day prior to the bombing.
Of course, two incidents don’t mean much statistically. But the plunge-and-quick-rebound pattern in the wake of those two cases is very much in line with historical precedents, according to a study of 51 major geopolitical crises since the beginning of the last century compiled by Ned Davis Research. Besides 9/11 and Pearl Harbor, the firm’s list includes the Cuban missile crisis and the Kennedy assassination.
The accompanying table shows the Dow’s average post-crisis performance. As you can see, within six months the Dow was 1.6% higher than where it had stood before the crisis hit, and 12 months after it was 6.3% higher.
To be sure, the stock market didn’t recover quickly in every case. But even when it didn’t, the market still rallied significantly from the panic-low set in their immediate aftermath.
What’s the clear investment lesson to draw? If you sell into a panic, you are likely to get the worst possible price. If extreme market turbulence is intolerable, you should act now to reduce your equity exposure rather than to wait until it’s too late. Your risk level should be set at whatever level you would be comfortable holding through a crisis.
Making more money will never be able to compensate for the emotional losses incurred during a tragedy such as 9/11. Nevertheless, doing something rash in our portfolios helps no one.
