Allan Sloan: Don't freak out! It's a decline, not a meltdown

The market losses, in dollars, are huge. But not in per cent, which is the key measure. Photo / AP

If you want to understand what's going on in the stock market, and what you should do with your own investments, don't assume the past three trading days have been rational. And don't talk about a market "correction". Doing that will rot your brain.

And don't panic. Although this is an ugly market, this isn't anything like the 2008-2009 market meltdown that wiped out millions of homeowners' equity and put the world's financial markets at risk. This is a stock market decline that, as we'll see in a bit, has a serious impact on only a relatively small number of Americans.

Even though I've taken substantial losses lately, I had to laugh at Monday's market because it was so absurd. The Dow industrials were down more than 1,000 points shortly after the market opened, then roller-coastered up about 900 points, then lurched around and plunged, ending down 588 points.

This is rational? Not to me, it's not. And it shouldn't be to you, either. It's a stampede, with the herd spooked by fallout created by the inability of the Chinese government to continue manipulating its financial markets, stampeding to dump US stocks shortly after the 9.30am market opening. Then stampeding to buy them. Then dumping them again.

And please don't forget that most of the trading in US stocks these days is by computers playing games with each other, not investors making decisions. So no matter what rationalisations supposed experts offer, on a day like this stocks go up because they're going up, then go down because they're going down.

Another good laugh I had, through my tears of financial pain, was seeing the 10-year Treasury note called a "safe haven". Give me a break. The only thing safe about it is that the US government won't default on a dollar-denominated Treasury security. The 10-year Treasury is an almost guaranteed loser investment.

There's almost no upside to holders of that security, and there's a serious downside. Unless you're a professional trader speculating on rate moves, you are taking a huge chance by locking up your money for 10 years at a crummy 2 per cent. When Treasury rates rise, which is inevitable, you will earn far less interest over the next 10 years than you would if you wait for rates to go up and buy your note then. Earning 0.02 per cent in a money market fund is a lot safer for a retail investors than 2 per cent on a 10-year Treasury.

As for the word "correction", which is a Wall Street euphemism for a big price drop? Give me a break. The Dow, S&P 500 and Nasdaq all reached correction territory, defined as being down more than 10 per cent from their highs.

But as a recovering English major, let me pose this question: If this has been a correction, does that mean that the price of stocks is now correct? If so, was the price three months ago, when stocks hit their all-time highs, a mistake? No, Wall Street calls that a "rally". So it's a "rally", not a mistake, when stocks are high. And a "correction", not a loss, when they fall.

The market losses, in dollars, are huge. But not in per cent, which is the key measure. The Wilshire 5000 Index, which measures the market value of all US stocks, had a three-day decline totalling about $2.2 trillion, about 8.8 per cent.

Bob Waid, managing director of Wilshire Associates, says we need to keep things in perspective by looking at percentage losses rather than just dollar losses. By that standard, things are painful, but not awful.

Even if the Wilshire closed at its low on Monday, Waid told me, the three-day loss of about $2.6 trillion (9.9 per cent) would have been the biggest ever in dollars, "but I'm not sure it would crack the top 20 in percentage losses".

Despite its multi-trillion-dollar decline in the past two months, the Wilshire is down only 11.3 per cent from its peak in June. By contrast, at the 2009 market bottom, stocks were down about 50 per cent from their highs.

Finally, even though the trillions of dollars in paper losses are a big deal for those of us with big stock holdings, there aren't that many of us.

Dean Baker, co-director of the Center for Economic and Policy Research who parsed Federal Reserve statistics for me, says that 93 per cent of US households own less than $27,000 of stocks directly. He estimates that only about a quarter of households own more than $36,000 of stock in their retirement accounts. So most people don't own enough stock to be hurt by the decline - just as they don't own enough to have benefited from the huge rise from the trough of 2009.

I have no idea where stocks go from here - no one does. But this isn't 2008-2009, which was really scary. This feels like a market decline, not a massacre. I added slightly to my US total stock market index fund on Friday and again Monday. I'm going to grit my teeth and try not to obsess over my portfolio.

I suggest you act the same way.