The stock market has enjoyed an extended period of strong performance dating back to the end of the last bear market in early 2009. While stock market performance can be measured in many ways, it is the Dow Jones Industrial Average that has passed several thousand-point milestones so far in 2017: The Dow first broke above the 20,000 mark on January 25, before passing the 21,000 level just over a month later. Then, in early August, it topped the 22,000 mark. As August ended, the seemingly smooth market rally hit a few bumps. While no one can predict the future, market strategists and analysts suggest that we could see some additional market volatility in the coming months. So how do investors keep all of this in perspective as they try to manage their portfolios? Here are three points to keep in mind when following the stock market:
1. The real value of each underlying movement in the Dow decreases as the market rises
While the Dow Jones Average is often used to provide a general reading on the state of the market, the index includes the stocks of the 30 largest companies. When the Dow Jones Industrial Average rises higher, the real impact of each change in its price is reduced. For example, when the Dow broke the 2,000 barrier in January 1987, it marked a remarkable 100 percent rise from the 1,000 level first reached nearly 15 years earlier. By contrast, when the Dow rose 1,000 points to hit 22,000 between March and August of this year, it represented just a 4.5 percent gain.
The same perspective applies to daily market movements. The stock market makes headlines when the Dow Jones average rises or falls 100 points in one day. Twenty years ago, when the Dow Jones hovered around 8,000 points, a 100-point move in the market represented a 1.25 percent change in value. Today, a 100-point move equates to less than half a percent change. In short, 100 points on the Dow Jones Industrial Average no longer mean what it used to.
2. Markets may pull back from record highs
Just as stock markets can go up, history shows that they can also go down. In the spring of 1999, the index reached the 11,000 mark. It moved higher for a few more months before a severe bear market occurred. The Dow fell to 7,286 in 2002 before returning to the 11,000 level in 2006. Similarly, the market topped 14,000 in 2007 just before the start of another severe bear market. It fell and did not reach that level again until early 2013.
No one can guarantee what will happen to stocks over the next week, month, or year. Stock markets are unpredictable in the short term, as fluctuations are part of the behavior of the market over time. Price swings are a reality for stock investors, but over time, stocks have historically rallied.
3. Indices may not be representative of your portfolio
While indices often make headlines, their performance may not be an accurate reflection of your own portfolio. Emotions run high when the market changes, but don’t let fear get the best of you. Stock market swings can act as a reminder to review your financial position, making sure your asset mix matches your long-term goals. Remember that the most important factors in your investment success are your goals, the time you have to invest, your tolerance for risk, and your commitment to save.
Reacting to the stock market or speculation about events that may occur in the future can make for interesting dinner conversation, but remember that it is not a proven investment strategy.
If you’d like help aligning your financial plan with your sentiments in the stock market, consider working with a financial advisor you trust. A financial professional can give you an objective perspective and help you stay focused on your financial goals.