Where Is The Market Going?
Financial advisors get asked this question all the time. I would say anyone who kind of, sort of works in something people consider close to the investment industry get asked this question. I have a good friend who works for an investment firm, but he is in charge of making sure everything is running smoothly behind the scenes. He would call himself a technology guy. He gets asked this question all the time from his friends. I have another close friend who works for a different investment firm. He's in charge of making sure their investment performance is calculated and presented properly. He gets asked this question all the time from people who learn he works in the industry.
People really want to know the answer to this question. It's understandable; It would be nice to have some kind of crystal ball. Unfortunately for those who want to know, there is only one answer:
Someone: "You're a financial planner? Where is the market going?
Me: "I don't know. Right now stocks are trading at prices that are different from yesterday, but nobody knows where it's going to go."
Fortunately, we don't need to know the answer to meet all of our goals.
What Happens When You Follow Markets?
Following markets is a recipe for disaster. The whole point of putting together a financial plan is to plan for the long term. Nothing distracts you from the long term more than trying to find out what the market is doing right now, or trying to figure out what it will do next week. It creates anxiety for us. If one of your main goals is to provide an education for your child, for example, and you've done the hard work of creating a savings and investment plan to reach that goal, there is little (I might even argue no) value in following stock markets.
There especially no value in following what the "Dow" does. The Dow, or Dow Jones Industrial Average, is nothing more than one index, and there are many reasons this is not a good reflection of what "stocks" have done. First, this index is only 30 companies. 30. There are thousands of companies that trade in the US alone, and many, many more that trade in other countries. Worrying about what the prices of 30 companies are doing is a waste of time. Second, these are only large companies in the US. This index says nothing about what small companies or foreign companies have done. Nor does it say anything about what bonds have done, or cash. You should be invested in many different investments (this is called diversification), and following what one section of your portfolio (which is a collection of investments) is doing gets you focusing on the wrong things. Lastly, the "Dow" is price-weighted. That doesn't mean much to the casual observer, but the gist of it is that a company that has a high stock price will count more in the calculation of the index value than a company with a lower stock price. If a company's stock splits, for example, then overnight the contribution of that company's stock performance to the index is cut in half.
Let me summarize that last paragraph for you, "the Dow is meaningless to you."
Why It's Okay To Let Go
After you do the work of figuring out what is important to you, and determining what your goals are, you can put together your investments with a collection of broadly-diversified and low-cost funds. This portfolio will be put together on purpose with your goals and values in mind. Just doing this will get you far ahead of what everyone else has done. Most people have accounts they've forgotten about, purchased funds that a magazine told them to buy, and tried to keep up with what their friends are doing. This low-cost, broadly-diversified portfolio already has the scary markets factored in. You know that there are going to be times in the future when the stock markets in the US crash again. You don't know when; you don't know why; and you won't know for how long. But they will happen. When it does you can buy more when the prices go on sale.
Key To Success
The key to success in personal finance and investing is to NOT know what the market did today. There's a story about an advisor who had a client ask him what they would do if the Dow fell below 20,000 again. The advisor said, "The Dow is above 20,000? That's awesome!"
Following what stock markets do every day or every week causes us to focus way too much on the short run, and it creates a false sense that day-to-day, week-to-week, or month-to-month fluctuations matter to what we say is important to us. I've written before about ignoring the financial pornography out there. This takes that a step further; instead of just ignoring financial news, I'm suggesting ignoring financial markets. I've written before about focusing on what you can control. You can't control what the market does. Recognizing that there will be down markets in the future, put together a portfolio of investments that match your values and goals, make sure it's highly diversified and low cost, and take your life back.
