Sushi Money

     We’re back to headline grabbers: “Stock’s Plunge…”  Maybe there’s only so many adjectives you can use to describe the stock market.  Do you think major media writers have a short list of words that they use on a monthly basis, and they cross them off on different days?   Seriously there are only so many ways to describe the ups and downs of the indexes.  Lately we’ve seen greater volatility.  One day we’re up a hundred points, and the next day back down.  I read somewhere that daytraders love this kind of a market… they make money going both ways.   But is the tagline “Stock’s Plunge…” really very helpful to the average investor?   Honestly, with the Dow down over 200 points at midday today, that’s still just over 1.5% down for the index!  The same thing for the S&P 500.  

     Here’s my question:  How can we not expect the market indexes to go up and down each day?  That’s what the market does… it can’t go straight up, at least very long.   And it doesn’t normally go straight down… at least very long.  Sometimes the trend goes up and down for longer periods, but the market is a place where people make, and lose, money.  The volatility and market swings are due to large financial institutions… mutual funds, banks, brokerages, pension funds, and a little bit of the retail investor, buying and selling securities.  As the market valuations increase through the years, we will see larger point swings up and down.  But on a daily basis do the percentage changes really mean anything?  Here’s a pretty helpful assessment from StockCharts.com while examining Dow Theory:

Daily Fluctuations

“Daily fluctuations, while important when viewed as a group, can be dangerous and unreliable individually. Due to the randomness of the movements from day to day, the forecasting value of daily fluctuations is limited at best. At worst, too much emphasis on daily fluctuation will lead to forecasting errors and possibly losses. Getting too caught up in the movement of one or two days can lead to hasty decisions that are based on emotion. It is vitally important to keep the whole picture in mind when analyzing daily price movements. Think of the pieces of a puzzle. Individually, a few pieces are meaningless, yet at the same time they are essential to complete the picture. Daily price movements are important, but only when grouped with other days to form a pattern for analysis. Hamilton [William Hamilton - early Dow theorist] did not disregard daily fluctuations, quite to the contrary. The study of daily price action can add valuable insight, but only when taken in context of the larger picture. There is little structure in one, two or even three days’ worth of price action. However, when a series of days is combined, a structure will start to emerge and analysis becomes better grounded.”

     Of course Dow Theory is just one way of looking at the market.  We always hear about not “watching the market” and just letting our investments do their thing over time.  For long-term investors, daily market fluctuations should not be a cause for concern.  Certainly macro-economic factors that come into focus will impact the daily market action over time.    But from a hands-on perspective, it’s fun to watch the market moves.  We feel rewarded and secure when the market goes up… and not very good when it goes down!  Admittedly, I do check the performance of my stocks and funds regularly.  If you’re managing your own investments, it’s important to keep track and evaluate performance and allocations over time.  But it’s very easy to become caught up in the media headlines when the market is simply doing what it’s supposed to.  Whenever I get concerned about the market’s volatility, I try to remember why I’m investing in the first place.  Do you watch your investments closely?  Or just a little?  I’m curious how others manage their investments over time.

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