The last few weeks have shown that the market is certainly volatile. Once at a peak of over 17,000 the market has pulled back to just over 16,000. While this certainly makes for news (notice how I didn’t say interesting news) I wanted to give our readers a little perspective on why I (nor they) shouldn’t care.
First, when the news outlets, friends, family, etc. say “the market” they are generally referring to the Dow. The Dow Jones Industrial Average is made up of 30 companies (yes, only 30) and is a price weighted index, meaning that each component of the index is made up in proportion to its price. Thus a stock trading at $150 makes up roughly 10 times more than a stock trading at $15. Naturally, one stock can price can skew this average pretty significantly.
According to the Wall Street Journal, there are just over 5,000 public listed companies in the US market (as of February 2014). That’s 5,000 versus 30 in the Dow. In other words, 30 stocks is a terrible sample of the overall market. Additionally, the only time any investor should be worried about the Dow is if they own those 30 stocks only, and have no additional diversification.
I’m often amused when my students will mention in class what “the market” did on a particular day. Often, they are the ones telling me what happened and are surprised when I don’t know. I rarely check what the market has done nor could I care less. One student’s jaw dropped when I mentioned I hadn’t checked my Roth IRA balance in months. When they ask what the best investment is they are often shocked when I say human capital (investing in themselves) and paying down debt.
We’ve written about not worrying about the market in the past. As our readers know we recommend well diversified, index portfolios of stocks, bonds and other investments. We could care less about what the market is doing and encourage our clients and readers to do the same.
As we’ve mentioned before, focus on the things you can control (fees, expenses, debt) and worry less about what you can’t (the market, weather, Congress). And certainly don’t worry about 30 companies in price-weighted index. They’re hardly representative of the overall market.