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 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%.
· 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.
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.
- May 21, 2018 The 5 Most Common Estate Planning Mistakes Parents Make May 21, 2018
- May 7, 2018 Here’s Why You Need to Think About the ROI of Education May 7, 2018
- April 2018
- Mar 26, 2018 Get Beyond The Price Mar 26, 2018
- Mar 12, 2018 Index Funds and Passive Fund Management: Understanding the Opportunity Mar 12, 2018
- February 2018
- January 2018
- Dec 11, 2017 The Psychology of Saving Money: Why some do it successfully and others struggle Dec 11, 2017
- Nov 27, 2017 Why Your Child's 529 Plan Should Be Direct Nov 27, 2017
- Nov 13, 2017 Get on the Road to Financial Success with These 4 Behaviors Nov 13, 2017
- Oct 30, 2017 Know the Lingo - the daily market recap and how it affects you Oct 30, 2017
- Oct 16, 2017 The 3 Unbreakable Rules for Financial Success Oct 16, 2017
- Oct 2, 2017 Follow These Steps When Selecting a Financial Advisor Oct 2, 2017
- Sep 18, 2017 Why You Should Choose a Fiduciary as a Financial Advisor Sep 18, 2017
- August 2017
- Jul 24, 2017 How Am I Doing? Jul 24, 2017
- Jul 10, 2017 Do I Pay Off (Student Loan) Debt or Do I Invest Instead? Jul 10, 2017
- June 2017
- May 29, 2017 Diversification: The Right Way to Manage Risk May 29, 2017
- May 15, 2017 Having a tough conversation and helping your aging Parents May 15, 2017
- May 1, 2017 What Everyone Should Be Doing Post-Tax Season May 1, 2017
- Apr 17, 2017 Want to Raise Financially Savvy Kids? Try These 5 Steps Apr 17, 2017
- Apr 3, 2017 Inflation: What Every Investor Needs to Know in 2017 Apr 3, 2017
- March 2017
- February 2017
- January 2017
- Dec 26, 2016 5 Steps to Get Your Finances Ready for 2017 Dec 26, 2016
- Dec 12, 2016 How Much Should I Invest In My Company Retirement Plan? Dec 12, 2016
- Nov 28, 2016 How About What Not To Do With 401(K) Contributions Nov 28, 2016
- Nov 14, 2016 Keeping it All Together: How to Balance Personal Financial Goals with Running Your Business Nov 14, 2016
- Nov 1, 2016 Nervous About The Election And Your Investments? Nov 1, 2016
- Oct 16, 2016 30-Somethings: Why are You Wasting Time Following the Stock Market? Oct 16, 2016
- Oct 3, 2016 Will 30 Year Old's Ever Get To "Retire"? Oct 3, 2016
- September 2016
- Aug 8, 2016 Why Budgeting Doesn't Need to Be a Dirty Word Aug 8, 2016
- Jul 18, 2016 What Does a Financial Planner Do? Jul 18, 2016
- June 2016
- May 16, 2016 It's Urgent, But Is It Really Important? May 16, 2016
- April 2016
- March 2016
- February 2016
- January 2016