How does the stock market actually work? Understanding this can help improve your personal investment strategy.
The stock market is essentially a big auction where buyers and sellers negotiate their transactions and are able to efficiently exchange shares of existing companies.
A transaction always includes two parties – a buyer and a seller. As with any free market, stock prices are based on expectations and demand. A stock’s price is a reflection of the collective view of all buyers and sellers in the market. Their opinions are affected by new information related to the specific company.
According to financial theory, a stock’s price is determined by three forces: (1) expected company earnings (dividends), (2) the expected rate of return, and (3) the expected earnings growth rate.
Nobel laureate, Gene Fama explains why long-term investors should know the reasons they’re investing, understand risk, and not focus on short-term ups and downs.
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A quick online search for “Dow rallies 500 points” yields a cascade of news stories with similar titles, as does a similar search for “Dow drops 500 points.”
These types of headlines may make little sense to some investors, given that a “point” for the Dow and what it means to an individual’s portfolio may be unclear. The potential for misunderstanding also exists among even experienced market participants, given that index levels have risen over time and potential emotional anchors, such as a 500-point move, do not have the same impact on performance as they used to. With this in mind, we examine what a point move in the Dow means and the impact it may have on an investment portfolio.
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Daniel Shub, AIF®, RFC®
Wealth Advisor & Founder
OCTO Capital Wealth Management
“I have found that the importance of having an investment philosophy—one that is robust and that you can stick with— cannot be overstated.”
The US stock market has delivered an average annual return of around 10% since 1926. But short-term results may vary, and in any given period stock returns can be positive, negative, or flat. When setting expectations, it’s helpful to see the range of outcomes experienced by investors historically. For example, how often have the stock market’s annual returns actually aligned with its long-term average?
The main reason to delay Medicare coverage at age 65 is if you are not retired and still have comprehensive coverage from your employer.
Another reason is to continue funding a Health Savings Account (HSA). Once you enroll in Medicare, you are no longer eligible to contribute to an HSA.
It is important to consult your employer or union benefits administrator to understand how your insurance works before making the decision to enroll or defer Parts A and B. Some employer coverage may require that you enroll in Parts A and B in order to maintain full coverage with your employer.
In order to defer both Medicare parts A and B, one must:
Investment fads are nothing new. When selecting strategies for their portfolios, investors are often tempted to seek out the latest and greatest investment opportunities.
Over the years, these approaches have sought to capitalize on developments such as the perceived relative strength of particular geographic regions, technological changes in the economy, or the popularity of different natural resources. But long-term investors should be aware that letting short-term trends influence their investment approach may be counterproductive. As Nobel laureate Eugene Fama said, “There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a marketing idea every week.”
WHAT'S HOT BECOMES WHAT'S NOT
Looking back at some investment fads over recent decades can illustrate how often trendy investment themes come and go. In the early 1990s, attention turned to the rising “Asian Tigers” of Hong Kong, Singapore, South Korea, and Taiwan. A decade later, much was written about the emergence of the “BRIC” countries of Brazil, Russia, India, and China and their new place in global markets.
As much as I value the unfettered access to information the internet provides, I recognize the potential harm that too much information can cause. Take, for example, a friend of mine, who was experiencing some troubling medical symptoms. Typing her symptoms into a search engine led to an evening of research and mounting consternation. By the end of the night, the vast quantity of unfiltered information led her to conclude that something was seriously wrong.
One of the key characteristics that distinguishes an expert is their ability to filter information and make increasingly refined distinctions about the situation at hand. For example, you might describe your troubling symptoms to a doctor simply as a pain in the chest, but a trained physician will be able to ask questions and test several hypotheses before reaching the conclusion that rather than having the cardiac arrest you suspected, you have something completely different. While many of us may have the capacity to elevate our understanding to a high level within a chosen field, reaching this point takes time, dedication, and experience.
After logging strong returns in 2017, global equity markets delivered negative returns in US dollar terms in 2018. Common news stories in 2018 included reports on global economic growth, corporate earnings, record low unemployment in the US, the implementation of Brexit, US trade wars with China and other countries, and a flattening US Treasury yield curve. Global equity markets delivered positive returns through September, followed by a decline in the fourth quarter, resulting in a –4.4% return for the S&P 500 and –9.4% for the MSCI All Country World Index for the year.
The fourth quarter equity market decline has many investors wondering how equities may perform in the near term. Equity market declines of 10% have occurred numerous times in the past. The S&P 500 returned –13.5% in the fourth quarter while the MSCI All Country World Index returned –12.8%. After declines of 10% or more, equity returns over the subsequent 12 months have been positive 71% of the time in US markets and 72% of the time in other developed markets.
Dimensional founder David Booth shares his perspective on the value of professional advice. In an uncertain world, the right financial advisor can help you determine the best overall investment approach.