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What Did The Stock Market Do Today? Thumbnail

What Did The Stock Market Do Today?

MY LEAST FAVORITE QUESTION TO BE ASKED AS A FINANCIAL ADVISOR

Once someone knows that I manage investments for a living it's not long before the question comes up: "what did the stock market do today?" Sometimes I'll pause and look at my phone to provide the answer. But the truth is usually my response is "I don't know."

Naturally when the "I don't know" answer comes out of my mouth it raises some eyebrows. After all - isn't it my job to know what the stock market is doing?

It is...to an extent.

THREE IMPORTANT FINANCIAL PLANNING QUESTIONS TO ADDRESS

Turn on CNBC and you'll quickly realize that the stock markets have been made into entertainment. It's something fun and exciting to talk about. People are making and losing money!

I never have CNBC on in my office.

Sure - stocks are a great way to build wealth. But people can build wealth in a variety of ways including real estate, small businesses and more.

I'd rather address more relevant planning questions:

  • What are your goals and values?
  • What are you hoping to achieve?
  • What immediate roadblocks to we need to overcome?

But that's not something that's easy to talk about in a casual conversation.

Investments are best viewed in the context of your comprehensive financial plan.

STOCKS ARE ONE COMPONENT IN MANAGING YOUR FINANCIAL PLAN

There are many drivers of long-term wealth.

Spending less than you earn and saving the difference is one.

Not taking on excessive debt is another.

Having an emergency fund for unforeseen hardships.

Optimizing the tax location of your assets.

Real exciting stuff here...

WHICH STOCK MARKET ARE YOU TALKING ABOUT?

So many people turn on the news and see what the Dow Jones did. An arbitrary index of 30 companies that is supposed to represent how the whole stock market is doing.

Most people don't even realize that the market is price weighted - the higher dollar value stocks influence the price change more than the lower priced stocks.

People more familiar with investing might branch out to the S&P 500 - a basket of 500 stocks in the US. That is market cap weighted which gives more preference to the biggest companies. However, as they grow bigger the index gets more concentrated. Currently about 20% of the index is in just five tech stocks.

And what about international? Few people discuss global diversification, yet Vanguard is allocating up to 40% of their target date funds stock money to overseas.

HOW MUCH DOES THE STOCK MARKET MEAN TO A MILLIONAIRE?

Let's picture a couple worth $2,000,000.

They have a $500,000 home and a business worth $500,000. That leaves them with $1,000,000 to invest in the markets.

Because they are nearing retirement, they only want to allocate 50% to stocks - which leaves them with $500,000 in stocks.

We do want to diversify them globally, so only 60% of their stock market money is in the US. $300,000 which represents 15% of their net worth.

Now we see that their home and business are worth considerably more to them that their US stock allocation. But we aren't asking for a daily value on their house or business.

So, when the market goes up or down in a day should we be worried about the 15% of their net worth exposed to it?

Or should we focus on the fact that in 30 of the past 40 years the S&P 500 has been positive?

THE STOCK MARKET IS IMPORTANT: IN THE LONG-TERM

I pay a lot of attention to the markets. It is a huge lever in the creation of wealth for my clients. I just look at the big picture. I know that time diversifies and minimizes volatility. That's why I ignore the day to day.

This chart below is one of my favorites. JP Morgan Asset Management puts out a wonderful guide to the markets. I can't think of a better chart to show how time and patience are the best success keys for a stock market investor.


It shows that over a 20 year rolling periods stocks have gained a minimum of 6% per year. If history serves as a guide I'm going to stay invested for the long haul and not worry if the market drops 3% in a day.


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Birch Investments, L.L.C. is a Registered Investment Advisor (RIA) in the State of South Dakota.

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