It’s been a wild few weeks if you’re a stock investor. At Simply Money, we want to share a few important reminders we think will help keep you sane.
1. Stop obsessing about “points.” The only thing you ever hear on the news or see online is, “The Dow tumbled 600 points,” or, “The Dow plunged 800 points.” Sure, these sound like big numbers, but points don’t mean anything!
As the Dow’s trading level gets larger, the impact of ‘points’ gets smaller. For example: in 1987 when the Dow was trading around 2,200, a 500-point drop was about a 23% loss. Today, with the Dow trading around 24,000, a 500-point loss is about 2%.
Simply put, percentages matter more than points.
2. While you’re at it, stop obsessing about the Dow. It’s only 30 stocks, meaning it doesn’t represent the broad U.S. economy. Look at the S&P 500 instead (this is comprised of the 500 largest publicly-traded U.S. companies).
Also, keep in mind that the Dow is a price-weighted index. Translation? Higher-priced stocks affect the Dow’s performance more than lower-priced stocks.
For instance, Boeing, the Dow’s most expensive stock at $330/share, will have a bigger impact on the index than Pfizer, the least expensive stock at $42/share, just because the stock costs more. This methodology can lead to just one stock having a huge influence on the Dow’s performance on a given day.
Meanwhile, the S&P 500 takes a different, more logical approach by being a market-weighted index – bigger companies (as determined by market capitalization) make up more of the index’s value.
3. Oh, and stop looking at your account values. If you’re a long-term investor (which we hope you are), you shouldn’t care what the stock market does over the course of a few days, a few weeks, a few months, or, quite frankly, a few years.
Stop driving yourself crazy by looking at your accounts every single time the stock market dips. You’re not helping yourself.
4. Remind yourself the losses aren’t “real.” Yes, we know they definitely feel real. But as long as you don’t sell when stocks are down, your losses are just on paper. They’re not real.
However, if you do decide to sell, you’re ultimately “locking-in” the losses you keep fretting about.
5. Don’t panic: Sorry, but what you’re experiencing now is the ‘price of admission’ for getting into the stock market.
A ‘correction’ (a drop of 10%-20%) happens about every 12-18 months, and a ‘bear market’ (defined as a drop of 20%+) happens about every six years or so. But the silver lining is these cycles are normal, even healthy.
6. Keep short-term money out of the market. If you have a big expense to pay for within the next three to five years, (for instance, college, a wedding, a down payment) this money should not be in the market to begin with.
As you’ve been seeing, the stock market can be way too turbulent in the short term. Money you need soon should not be exposed to this risk.
Similarly, if you’re approaching retirement in the near future, have a cash cushion that can cover a few years of living expenses. This strategy can help you avoid withdrawing money from your investments (and, as mentioned above, locking in losses) if the market happens to fall early in your retirement.
7. Have someone look at the risk you’re taking. Do you know how much risk your retirement plan and investments are taking? Or, maybe you do, but you’ve still been a nervous wreck lately?
In both of these scenarios, work with a fiduciary financial advisor to help make sure your investment mix of stocks and bonds is appropriate for your goals.
The Simply Money Point
We know a lot of our tips are easier said than done. After all, this is your hard-earned money we’re talking about. But as we like to say at Simply Money, the market likes to take from the impatient and give to the patient.
And to help you get on track for retirement, visit our Retirement Resources library.
 As of 12/19/18
 As of 12/19/18