Many investors are fearful of the next market crash. When will it happen? How big will it be? Will my retirement savings be at stake?<\/p>\n
These concerns are certainly understandable, considering that the 2008 Financial Crisis is still visible in the rearview mirror. But, it turns out that investors are a lot more worried than they should be. If we define a stock market crash as a single-day event where the market precipitously falls, we find that these crashes are actually quite rare. Looking at declines in the magnitude of the October 1987 drop (-22.61%) or \u201cBlack Monday\u201d in October 1929 (-12.82%), Yale researchers William N. Goetzmann and Robert J. Schiller along with Case Western Reserve\u2019s Dasol Kim, found that there is a less than 1 percent<\/em> probability of an extreme stock market collapse in any six-month period.<\/p>\n With that in mind, the next statistic might surprise you\u2026<\/p>\n Since 1989, those researchers (Schiller in particular) have been tracking the judgments of individual and institutional investors on the probability of a severe market crash. In other words, over the past two-plus decades he\u2019s been asking investors if they think a stock market crash is likely ahead.<\/p>\n From all the data that he collected, he found that investors, on average, said there was a 19% chance of a one-day market crash in the next six months. This means that investors pegged the likelihood of a crash at 20 times <\/em><\/strong>the historical precedent.<\/p>\n Investors are more fearful of a market crash than they should be. Are you that concerned too?<\/p>\n Too Much Noise<\/strong><\/p>\n The researchers were curious where this additional concern\/fear was coming from, and their argument here might not surprise you at all \u2013 they cited the negative influence of the news media on investor behavior. The researchers argue that journalists can \u201cframe recent events through selective reporting \u2013 emphasizing negative outcomes.\u201d Go figure.<\/p>\n It\u2019s no secret that excitement, negativity and scandal are what sell newspapers \u2013 not optimism. In the financial news community, it\u2019s almost always about looking for the next shoe to drop. News reporting is more often about what is going wrong or what could go wrong, versus all of the factors that are going well. If you did not hear too much about the solid corporate earnings rebound at the tail end of last year, and how that <\/em>is also playing a role in the stock market rally, then you see my point.<\/p>\n Case in point: Schiller and company used\u00a0Wall Street Journal<\/em>\u00a0articles to test their theory, measuring the influence of word choice and subject matter on investor expectations of a crash. They searched articles for negative terms like \u201ccrash\u201d and \u201cbad news,\u201d and then they did the same for optimistic phrases like \u201cboom\u201d and \u201cgood news.\u201d Their data confirmed what most would have suspected: \u201carticles with \u201ccrash\u201d and related terminology correlated with higher investor expectations of a stock market crash in the succeeding six months.\u201d<\/em><\/p>\n Bottom Line for Investors<\/strong><\/p>\n Avoid snap judgments and watch less financial news!<\/p>\n Of course, I\u2019m not advocating you receive less information. I\u2019m just proposing you receive less bad information. <\/em>And there is a lot of it out there. A daily diet of CNBC will make most investors want to duck, cringe, and rethink their entire portfolio strategy. But, most of the time we should be doing none of those things.<\/p>\n As has been the case for most of the last eight years, many of the fearful headlines have not amounted to much. China\u2019s hard landing? Forgotten. Europe\u2019s sovereign debt crisis? Not as bad as many expected. Brexit? The markets rallied in the months after it. You can go on and on, and in each of those cases there was a slight hysteria in the financial news media, but the stock market found a way to keep climbing. I\u2019d expect the same to be the case in 2017.<\/p>\n","protected":false},"excerpt":{"rendered":" Many investors are fearful of the next market crash. When will it happen? How big will it be? 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