I Have No Idea What the Stock Market is Doing

I have a guest post up today on Frugal Rules that you should definitely check out. But now, back to your regularly scheduled programming…

I love investing. Ever since I got the itch about 4.5 years ago, I’ve wanted to learn more and more. I read books. I read blogs. I read journal articles. I make up spreadsheets to test assumptions. Basically I’m a huge nerd. And while I’ve come to enjoy learning about all aspects of personal finance, from insurance to estate planning, investing remains my true love.

But let me tell you a secret. In contrast to the popular opinion of what an investor “in the know” looks like, I have no idea what the stock market is doing today. I have no idea what it did yesterday. I have only the vaguest idea of what it’s done for the last month or so.

So if I truly love investing, why couldn’t I tell you even this basic information? Because it doesn’t matter. It just doesn’t matter.

The stock market movements are important, but…

Let me start off by saying that I don’t ignore the stock market because the movements are unimportant. I’ve written before that the general market movements have a significant effect on our personal investment performance, no matter how we’re actually invested. Research actually shows that as much as 75% of our returns are derived from the returns of the general markets. That’s crazy!

Those numbers would seem to advocate for spending a great deal of time worrying about the daily market movements. After all, if that’s the factor primarily driving our returns, shouldn’t we care an awful lot about it? That’s certainly what the media would have you believe, with its regular updates on how the various stock markets are doing right now, have done in the past day, or what the experts think they will do in the coming days and weeks. And it’s certainly what many financial experts would like you to believe, as each tries to position him or herself as the one person who can help you navigate these turbulent waters.

But the fact of the matter is that focusing on the daily ups and downs of the market doesn’t get you any closer to reaching your financial goals. In fact, it’s more likely to cause you to make mistakes than it is to make you money, with the additional cost of added stress.

It’s the long term that matters

Let’s start with the obvious. Some days the market is up. Some days it is down. Sometimes it’s up or down by a lot, sometimes just a little. But it’s always moving. These short-term movements can be scary, and on the really bad days it might feel like we’re losing control of our financial goals. But there are two realities about these daily fluctuations that we need to take to heart:
1. We cannot control them.
2. They are temporary.

That first point is so important. No matter how much we try, we cannot control the market movements and we cannot predict how they will move. Trying to do either is a waste of time and will lose you money over the long run. But you can control your exposure to the market movements through your asset allocation. Picking a mix of investments that is either more aggressive or more conservative will determine just how much those movements affect your money. But this is a long-term decision based on your risk tolerance and desire for returns, not a knee-jerk reaction to what the markets are doing today.

It’s also important to understand that daily, weekly, monthly and even yearly returns are simply snapshots in time. They do not represent long-term trends. They are temporary, much like an unusually hot day in the middle of winter is simply one day of many, not representative of what all future days will look like. Trying to react to or infer larger meaning from these day-to-day changes is not only pointless, but it is harmful.

One of my favorite examples of this comes from one of my favorite investing blogs, Canadian Couch Potato. He shows that while historical long-term stock market returns are around 8.5%, the annual returns almost never fall near that long-term average. In fact, about 67% of the time the annual return is at least 10 percentage points higher or lower than that long term average. If you tried to make long-term conclusions based on the returns from any single year, those conclusions would most likely be wildly wrong.

It’s the long-term trends that we care about, and those have been consistently strong for many decades. Short-term movements tell us nothing about what to expect going forward.

My plan doesn’t have anything to do with short-term movements

A little while back I outlined my personal investment plan. Basically, I have four mutual funds representing four different asset classes. Those asset classes were picked because of their long-term characteristics, and I plan to keep the allocation between those asset classes stable for my entire life. The only real fidgeting that happens comes when I add new money, or when the market movements cause my allocation to get out of whack and I have to rebalance.

Nowhere in my plan is there any mention of reacting to the day-to-day stock market movements. They weren’t part of how I chose my investments, and they aren’t part of my ongoing management. They simply aren’t relevant. So why would I pay attention to something that has no bearing on my plans?

Summary

We’re often told that we need to stay “in tune” to the markets if we want to be successful with investing. Honestly, this couldn’t be further from the truth. Successful investing involves a strong understanding of the long-term characteristics of different asset classes. It involves constructing a portfolio that takes advantage of these long-term characteristics to capture a desired level of return at a reasonable level of risk. It involves contributing money regularly and sticking with your plan through the ups and downs.

If someone asks me what I think of the stock market right now, I’ll be honest and tell them I don’t even know what it’s doing. And even if I do know, I have no thoughts. It just isn’t important.

GET THE ROAD MAP
Start building a better financial future with the resource I wish I had when I was starting my family. It’s free!
0 Comments... Be the first to comment
  • Your Daily Finance June 26, 2013

    i have seen P(pandora) bounce 5-10% in one day on the up and the down the other way. I pay attention more often then not to make sure I don’t miss the buying and selling of my position. For some the markets are too crazy but people buy and sell so much off emotions. Stick with it for the long haul but remember there will be days you see and feel the pain. Just try to be diversified.

    • Matt @ momanddadmoney June 26, 2013

      I only invest in index funds and really only do so on a regular schedule, so the ups and downs are totally irrelevant to me. Even if I do pay attention, and the reality that sometimes I do just for fun, I don’t care one way or the other and certainly don’t act on anything.

  • Holly Johnson June 26, 2013

    I have no idea either! I haven’t had time to pay attention to any f it. I also try not to get too worked up about short term issues.

  • I tend to log in and check my portfolio only once per month to update my networth numbers but aside from that, I more or less ignore the market news entirely. The market is going to rise and fall with or without me and there isn’t anything I can do about it.

    • Matt @ momanddadmoney June 26, 2013

      I do check on my portfolio regularly to make sure I don’t need to rebalance, and I check all my accounts monthly to update our net worth, just like you. But other than that I really don’t give it a second thought.

  • Laurie @thefrugalfarmer June 26, 2013

    I like your take on this, Matt. I think if more people thought that way, there would be a lot less rash buying/selling decisions made.

    • Matt @ momanddadmoney June 26, 2013

      Couldn’t agree more. Investing decisions made quickly are not likely to be made well.

  • DC @ Young Adult Money June 26, 2013

    For personal finance purposes I definitely agree with you. I might move from corporate finance to the investment side so I have been trying to stay more in-tune with the market and be knowledgeable about how it has been performing in the short-term, but that’s totally different than tracking it for long-term personal finance goals.

    • Matt @ momanddadmoney June 26, 2013

      What part of the “investment side” might you move to? Would you need to know what’s going on because it’s actually helpful to what you’re doing, or more because it’s just what’s expected of people in that position?

  • Done by Forty June 26, 2013

    Thanks for this reminder! I make my investment purchases the last week of the month and I have a bad habit of trying to do so on a “down” day, even though I know that’s a fool’s errand. I think I’m going to start simply buying on a set day, like the 28th, every month.

    (I tried clicking the link to your personal investment plan, as we also only have 4 mutual funds by using the Simpleton’s portfolio…but I think it may be a broken link.)

    • Matt @ momanddadmoney June 26, 2013

      I’m guilty of adding unnecessary complication too. I do our regular IRA contributions manually so that I can rebalance with the contributions. If I’m being totally objective about it, I should just let them happen automatically and rebalance with separate trades if necessary. So my control freak still shines through a little bit.

      Thanks for the notification about the link. It’s fixed now.

  • Andrew June 26, 2013

    I agree that long term investing is your best bet. It is too time-consuming and stressful paying attention to what the stock market is doing everyday.

  • Rita P June 26, 2013

    Stock Markets are exactly like Real estate Market . You need to invest both time and money. After buying a home do you check the price everyday for your property. No right, Same goes for stocks, invest in them, harvest them for long term to make good money

    • Matt @ momanddadmoney June 26, 2013

      I agree that checking the price daily for either is incredibly counter-productive, though I wouldn’t count a home as a way to make good money. Unless you’re talking about a rental home, but there the main source of returns is the regular income, not price appreciation. But if there was a way to check on your home price every day, my guess is a lot of people would and it would freak them out! Much like with the stock market, totally useless information.

  • Grayson @ Debt Roundup June 26, 2013

    I don’t see any point in checking the market daily. While I might notice what is happening when I am running through some sites for the day, I don’t go through checking all of my stocks. I find that is just a waste of time. As you said, you should be investing for the long run, and worrying about fluctuations is going to cause you do do something stupid.

    • Matt @ momanddadmoney June 26, 2013

      Yeah, when I find out it’s usually tangential to something else as well. It can be tough to avoid. But even when I find out it just doesn’t matter to me. No point to it.

  • Rachel@Mobilligy June 26, 2013

    I completely agree with you. The daily stress of checking the market is just not worth it- there are too many ups and downs, and allowing your stress level to rise and fall with each one just isn’t a way to live (and definitely not worth the toll it takes on your health).

    • Matt @ momanddadmoney June 26, 2013

      It can definitely be a lot of stress without any benefit. Much better to just leave it alone.

  • Budget & the Beach June 26, 2013

    This is one area of PF that I haven’t a clue about. 🙁 But I agree that if you’re into investing and obsessed it seems like a very stressful way to live life.

    • Matt @ momanddadmoney June 26, 2013

      To me, the funny thing is that the people who spend a lot of time stressing out about it are pretty likely to do worse than the people who have a solid low-maintenance plan in place that they rarely have to think about. It’s really one of those things where increased action typically leads to decreased results. There’s a lot of evidence to back that up.

  • cashRebel June 26, 2013

    I think it’s so funny when people freak out over a market “correction”. I’m just a long term index investor, so all this short term stuff doesn’t matter to me either.

    • Matt @ momanddadmoney June 27, 2013

      Yep. Freaking out doesn’t help anyone. Well actually it helps the media. And anyone selling a solution. But that’s it.

Leave a Comment