Finance is littered with jargon, and nowhere is that more evident than in everyday investing. I believe the majority of investors do not need to follow the market every day or even every week; however, there are basic financial concepts that can be worthwhile for you to understand.
Here is what you need to know when it comes to the daily market and the actions you, as the investor, can take.
The “Market” And Associated Terms
Let’s start with a financial headline and some terminology. A common financial phrase you have likely read or heard on the news sounds something like this:
“The Market was up 10 points today on better than expected 3rd quarter earnings at [fill in the blank tech, finance, medical company]”
The Market
· The majority of the time “the market” actually refers to the stock market and, more specifically, the S&P 500 (which represents the 500 largest US companies and has become the standard measuring stick for judging the success of “the market”). Historically, the Dow Jones Industrial Average was the standard gauge, however the fact that it is only comprised of 30 companies makes it less representative of the broad market. “The market” can also mean such things as the bond market, treasury market, and housing market.
Up 10 Points
· When the term ‘up 10 points’ is used in connection with the market it means that the index went up 10 points from where it began on that same day. For example, a rise of 10 points on the S&P 500 that started the day at 2570 is a .39% gain. So taking the average of all of the price movements of the underlying stocks of the index that day comes out to a gain of .39%.
Earnings
· Essentially, earnings are the amount of after-tax profit a company earns during a given time period, usually over a quarter (three months) or a year. Market analysts make quarterly and yearly estimates of each company’s earnings. If a company manages to exceed these estimates, this company is said to have ‘beaten earnings.’ When this happens, it is usually a signal to the financial world that the company is performing well and is likely to experience continued success.
What All This Really Means For You
Not much! As a long-term investor, daily market activity has very little impact on how well your overall investment strategy performs. The market will fluctuate, that’s what it does. On some days, investors can observe extreme levels of volatility (a measure of price fluctuation).
Pundits and analysts are always trying to explain away market movements, but the reality is that many factors, many external to the markets themselves, drive daily fluctuations in the market. Politics, international conflict, natural disasters, and the supply and availability of certain commodities (like oil) can all cause the market to swing.
So what action should you take as a long term investor after a bumpy day in the market? None. Your investments decisions should be based on your individual goals, time horizon, and risk tolerance and should not shift based on a bad day in the market.
Therefore, as a long-term investor, you can view the market more as an interesting news headline that reports on the daily emotional pulse of the economy rather than a predictor of your future financial success or demise. No single day of trading in the stock market should have much bearing on your personal finances if you’re saving for retirement in a well-diversified investment portfolio.
Conclusion
No one knows what the future holds. If we did, we would all be able to spot the next .com boom and Amazon. Day-to-day market movements are irrelevant for the long-term investor; and earnings, while important, are more of a game that traders and analysts play for short-term profit (trading around expectations, if you beat earnings your stock goes up, if you don’t it goes down) than long-term financial independence.
