The Dow has "plunged" 1,100 points in 3 days: Here's who's lost money There's a lesson to be learned in the Dow's decline for long-term investors.

Sean Williams | The Motley Fool

Show Caption Hide Caption Wall Street drops over 1 percent The S&P 500 fell for a third straight day after President Donald Trump said the U.S. would slap tariffs on steel and aluminum. As Fred Katayama reports, that sparked fears of higher prices and a trade war.

This certainly has been a year of "firsts" for the stock market and iconic Dow Jones industrial average (DJINDICES: ^DJI). Last month, investors witnessed the first stock market correction in roughly two years, as well as two huge single-day point declines in the Dow. On Feb. 2, the Dow dipped almost 666 points, while on the following Monday, Feb. 5, it tumbled 1,175 points. These drops represent the seventh-largest and largest point declines in the Dow's nearly 122-year history, and they were instrumental in pushing the Dow down by more than 10% -- the official level signifying a stock market correction – from its all-time high.

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The Dow has shed 1,100 points in three days

However, following a pretty steady rebound from its early February lows, the Dow's sputtering, once again. On Tuesday, Feb. 27, the Dow shed about 300 points. On Wednesday, Feb. 28, investors kissed another 380 points goodbye. Then on Thursday, March 1, it gave back another 420 points -- albeit it was down almost 600 points intraday. Altogether, the Dow has plunged 1,100 points over a span of three days.

As with the Dow's dive at the beginning of February, it doesn't look as if a single catalyst was at play, but rather a confluence of factors. For instance, President Trump's announcement on March 1 that he'd be implementing tariffs of 25% on steel imports and 10% on aluminum imports sent shockwaves throughout Wall Street. There's clear concern that such a move could spur retaliatory tariffs from U.S. allies.

Meanwhile, economic growth figures continue to suggest that first-quarter gross domestic product (GDP) could be the strongest we've seen in many years. Though strong growth is generally a good thing, it could speed up the process by which the Federal Reserve tightens monetary policy. That's a fancy way of saying that interest rates could rise more quickly than expected, which could slow or halt housing expansion, curb lending, and hike credit delinquencies, among other things.

The 1,100-point "plunge" in the Dow could even represent something as simple as profit-taking. It's the middle of tax season, and it wouldn't be surprising to see investors selling stock to cover their tax bills.

Who lost money this week? A lesson to be learned

Regardless of the reason for the decline, you might be under the impression that this 1,100-point decline in the Dow over a three-day stretch caused a lot of people to lose money this week. But truth be told, that's not actually the case. The only investors who lost real money this week are those who panicked and sold their holdings. Everyone else who's invested for the long haul has merely witnessed a rather benign, if not normal, drop in stocks. After all, 1,100 points in the Dow only represents a pedestrian 4% decline in the index.

Since 1950, the broad-based S&P 500 (SNPINDEX: ^GSPC) has undergone 36 corrections totaling at least 10%, when rounded to the nearest whole number, according to Yardeni Research. In each and every instance but one -- the current correction -- a bull market rally has completely erased the decline in stocks. Often, this happens within a matter of weeks or months. In other words, while stock market corrections are actually quite common, occurring about once every two years, they tend to be short-lived.

On the other hand, bull markets tend to last considerably longer than stock market corrections and bear markets. In fact, we've spent nearly three-quarters of our trading days since 1950 in a bull market relative to a correcting stock market or bear market.

And if you were thinking about trying to time the stock market and its next dip, don't bother. Aside from the fact that timing the market is impossible to do with any accuracy over the long run, some of the S&P 500's best days over the past few decades have come within two weeks of its worst single-day percentage declines. Miss even one of those days and you could severely hamper your returns.

There are really only three things you should be doing as the Dow is dropping. First, stay calm and be aware that corrections are perfectly normal and healthy for stocks. Second, consider re-examining your holdings to ensure that your investment theses still hold water. Only sell stocks that no longer match your original investment thesis. Lastly, consider buying more stock. History shows that the stock market tends to appreciate over the long run, so the odds are in your favor if you scoop up high-quality stocks.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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