Financial AdvisorsInvestingPredicting the Markets

Don’t Get too Wrapped up in the Dow Jones

By December 9, 2014 October 4th, 2016 No Comments

I feel like I need to comment on something. As hard as it may be to believe, I recommend paying very little attention to how the big stock market indicators, e.g., the Dow Jones Industrial Average (Dow), the S&P 500, or the NASDAQ are doing. I also never recommend buying or selling investments based just on those numbers themselves.

After all of the ups and downs over the years, I am now getting as many nervous phone calls and emails when the market is up as when it is down. (It’s still not very many, usually 1 or 2 after an extended move in the Dow.) I have had a lot of conversations with people over the years and I understand the worry and nervousness and frustration when dealing with the stock market. I hope to try to relieve that a bit.

Being nervous when the market is up seems to be a new thing, and less common, but it exists. I’d like to remind everyone that how the Dow is doing any day, week, month, quarter, year, or even decade, probably doesn’t make much of a difference in your retirement or your financial plan. It’s true.

The biggest reason for that is that none of our accounts is based on the Dow, the S&P 500 or the NASDAQ. Our accounts have funds that have some of the same stocks, sure, but we also have many more thousands of stocks in our funds, and many people also have funds that have thousands of bonds in them. Learning that the Dow is up or down 1% for the day gives you almost no information as to how your account did because the Dow is based on the price-weighted performance of just 30 stocks. It’s the one that everybody pays attention to because it has been around for a long time, but it is almost essentially irrelevant for our purposes.

The S&P 500 might give you a slightly better indication because it captures a much bigger slice of the U.S. stock market, but for all of the people who know within a hundred points where the Dow is, maybe a tenth or a hundredth as many know where the S&P 500 is trading. (2,065 around noon on Friday as I am writing.)

The S&P 500, however, does not have any small company stocks, foreign stocks, or bonds of any sort. We have all of those different stocks, and anybody anywhere near retirement age also has bonds. So the S&P 500 might have 1/4 to 1/3 overlap with most of our accounts. Maybe more for younger people – it’s really not that much.

So if the Dow goes down 1%, it doesn’t actually give you any indication of how your account did. If the S&P 500 goes down 1%, it probably means that your account went down, but most likely less than 1%, and possibly much less than 1%, like 1/3 of a percent, depending on how close you are to retirement or if you are actually retired.

There are three short takeaways from this. First, that despite all of the ups and downs over the last 15 years, accounts that have stayed invested in a diversified portfolio have gotten about the returns expected from the different markets for stocks, bonds and cash. The key is that you have to stay invested in a diversified portfolio that makes sense for your situation.

The second is that if you are a client of ours, your account bounces around way less than the headline numbers you hear on the news every day, so don’t pay too much attention to them, and don’t ever make any investing decisions based on them.

The third is that the bouncing around and sometimes wincing when you hear the headline number is the price you pay for returns much higher than inflation or cash. Much. Since 1900, cash has returned about 1% more than inflation, bonds about 3%, and stocks about 6%. Compound those numbers over a lifetime and the difference in returns you earn by investing is huge! So don’t let it bother you when the Dow is down or even when it is up.

Michael Garry Yardley Wealth Management

Author Michael Garry Yardley Wealth Management

Michael Garry is a CERTIFIED FINANCIAL PLANNER™ practitioner and a NAPFA-registered Financial Advisor. He is a member of the National Association of Personal Financial Advisors (NAPFA) and the Financial Planning Association (FPA).

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