Three Ways for Investors to Save their Sanity
It’s happening again right now. The financial media is cranking out headlines about how many “points” have dropped from “The Dow”. Not only is this information just about worthless, but I would argue it is only doing harm to the investing public.
As a service to you, I offer this three-step guide to staying sane in the face of a financial media frenzy.
Step One - Kill the Messenger
OK. Please don’t actually hurt anyone. What I mean is that you should turn off your TV/Radio/Computer if you sense that someone is simply trying to get you riled up. Keep in mind that it is not the job of a media personality to give you good advice. It is their job to keep you glued to their programming so that they can sell more advertising. Few things are as effective at holding the attention of the public than fear and greed. That is why you almost always hear the “talking heads” rant about the market “plunging” or “soaring” and never simply going up and down.
Step Two - Forget about “The Dow”
The Dow Jones Industrial Average (The Dow) is about as worthless as an index could be. It represents the stock performance of only 30 companies. They are all large companies. They are all American companies. In a day when a diversified portfolio could easily hold over a dozen asset classes (bonds, small-cap stocks, international stocks, bonds, etc.) a list of 30 Domestic Large Cap Stocks may only represent a tiny fraction of such a portfolio in any meaningful way.
Not only does the Dow only track 30 strikingly similar stocks, but the list of stocks changes! In fact, when GE was dropped from the index in 2018, it was the last of the original 30. It is absurd to place value in a number measuring performance over time when the things being measured are completely different from the beginning of that time to the end. Imagine if a team won the Daytona 500 by getting a new car and driver every 40 laps. What does that win tell you about the skill of the driver that crossed the finish line? It indicates just about nothing.
Step Three - Ignore the “Points”
When the charismatic television personality inevitably screams about the “plunge in the Dow,” they will usually measure the change in “points”. This is another tactic that they use to make the ups and downs of the markets seem more dramatic than they truly are. After all, which of the following is more likely to get your attention, “Dow plunges by 250 points,” or “Dow drops by less than one percent?”
Conclusion
Some anxiety is a natural part of being an investor. Markets do go up and down after all. Ideally, your investments are positioned in such a way that you don’t lose sleep over the occasional pullback in stocks. If you do feel your blood pressure start to rise however, I hope you remember the three steps above for keeping your composure.