“Blood bath,” “Sell off,” “Spooked investors,” “Wild session,” “Stocks plunge,” “Crazy market swings.”
These are just a few of the sensational phrases the financial media used last year to describe stock market activity. As a certified financial planning practitioner for over 20 years, I would argue that when the media reports hourly (or even daily) stock market returns, all they do is create unnecessary excitement and anxiety for rational investors. The stock market’s hourly/daily activity is NOT newsworthy of our attention and is irrelevant in the long-term. These market reports tell an incomplete story, yet we are subjected to them on a daily, if not hourly basis.
When you catch the market index returns for the day, what do they report on? Of course, it is the Dow Jones, and usually the S&P 500. We often forget that the Dow Jones is only 30 stocks. The S&P 500 is 500 stocks. These are hardly good representations of the entirety of the U.S. stock market, which includes thousands of other stocks representing other areas of the market, all of which are included in a fully diversified investment portfolio.
And how about international indices, both large and small, which also represent thousands of more stocks? There are so many indices to track; from Emerging Markets and Real Estate Investment Trusts (REITs), Value and Small, to Growth and Large. Obviously, the media can’t report on all these other indices from around the globe in a quick five-second sound bite on the nightly news. But their continued focus on such a small area of the stock market does nothing to inform or educate the general public.
On average, there is a 50/50 chance of the market being up or down each day, but over longer periods market indices are positive. We would all be better off if the daily stock market returns were not reported at all. Weekly reports suffice and keep everyone’s blood pressure down. (Financial professionals commonly recommend reviewing your portfolio at most once a month, but likely quarterly is best). The less often you look, the less volatile you’ll perceive your portfolio to be and the easier it will be to achieve those long-term positive market returns.
Slow and steady wins the race. Cable TV’s business new channels, with their constant ticker tape of stock market index tracking and guest commentators making baseless market predictions or selling their mutual fund leaves investors confused on how to really invest. “Beat the market,” speculative stock picking efforts, and market timing strategies consistently cause a negative contribution to portfolio returns. For the most part, these hyperactive market-tracking activities waste time, cost money, and don’t reward your efforts. This is a complete distraction to sound investing principles such as low costs, diversification, asset allocation, and tax management.
This is not just our firm’s opinion; it’s been proven time and again by numerous academic studies. The most important point of disciplined long-term investing and portfolio rebalancing is to have a plan in place in preparation for market volatility. Always expect extreme volatility from time to time and take advantage of portfolio rebalancing opportunities when they are identified. Although volatility isn’t necessarily comfortable for investors to experience, it can reward you handsomely if handled properly.
So, the next time you’re having your early morning coffee and hear your trusted news outlet reporting on the Dow Jones Futures (not just the actual down to the second index performance, but a prediction of what it might be before the stock markets even open) quickly turn down the volume and avoid this meaningless “news”. Then, later in the day when you’re driving home from work, and you hear how the stock market did for the day, quickly change the station and maybe try to catch the Warriors or Giants game instead.