It was like a car wreck.  It happened fast.  It was very scary.  And, while not fatal, it left those involved injured and dazed.  So what happened?  The stock market plunged Thursday in a wild five-minute selloff that left experts trying to figure out what caused it. 

The Dow Jones Industrial Average experienced its largest-ever point decline in intraday trading, falling almost 1000 points before it recovered to close down 348 points, or a little more than 3%.  After 8 weeks in a row of gains, the last week has brought back some of the negative volatility that reminds many of the drama that we saw in late 2008 and early 2009. 

There are fears about the spread of the European debt crisis which have rattled investors both here and abroad.  The riots taking place in Greece as their government tries to implement some austerity programs have not helped.  Some fear that what is going on in Europe is a preview of what could happen here in the U.S. with our government spending and deficits.

However, the ferocity of yesterday’s selloff seemed to be caused by a breakdown of the market’s trading systems.  Many are blaming an erroneous trade that caused some of the market’s most stable blue-chip stocks, like Proctor and Gamble, to fall 35% in two minutes.

One theory is that one trading error triggered a piling-on effect from some computerized trading programs that kick in when the market moves lower.  And then, some pre-set orders from traders and investors to sell on declines, were most likely triggered.

After the huge move downward, the markets recovered (mostly) and now the regulators and market officials will try to get to the bottom of the problem.  It’s hard to fathom that one trader’s fat fingers, simply hitting the wrong key on a trade entry, could lead to a day like we experienced. 

The good news is that, while it was difficult for anyone to avoid losses for the day, those with a well-planned portfolio suffered less.  Once again, the benefit of diversifying across several asset classes was clear to see.  How?  In the panic and fear-driven selloff, traders and investors fled to the relative safety of U.S. Treasuries and other fixed-income securities.  All of the fixed-income funds that we use for our clients showed small gains on the day.