What the Headlines Don’t Tell You
If you were following the headlines earlier this week, you might have seen some like this: “Stocks Decline Sharply as Market Selloff Accelerates,” or, “Wild Day for Stock Market as Investors Warily Await the Fed’s Moves.” Such headlines can cause investors to act emotionally in the moment and buy or sell based on the news, and they can also cause confusion when tracking portfolio returns. For example, let’s say you saw a news story that said the S&P 500 was up 27% in 2021, but your portfolio statement showed your returns were lower. Why don’t your returns reflect what you saw in the news? Probably because, as radio commentator Paul Harvey used to say, you need to hear “the rest of the story.”
What is “the stock market,” anyway?
Let’s start with how we define the stock market we hear about in news reports. Investopedia defines the stock market as a “collection of exchanges and other venues where the buying, selling, and issuance of shares of publicly held companies take place.” That collection includes major indices like the S&P 500, the Dow Jones Industrial Average (DJIA), the Nasdaq Composite and around 5,000 others, just in the U.S. Each market index follows the performance of a “basket” of stocks that are representative of a particular market or sector. Here’s a quick snapshot of a few major indices you may hear about frequently in the news:
- The S&P 500 tracks the performance of 500 large, U.S. companies and is a market capitalization-weighted index.
- The Dow is a price-weighted index of 30 large, U.S. companies whose stocks are considered to be “blue-chip.”
- The Nasdaq Composite comprises more than 3,000 Nasdaq stocks and is a market capitalization-weighted index, similar to the S&P 500.
Often, when news reports talk about “the market,” they are referring to one or more of these U.S. indices. But if you have a diversified portfolio, it’s likely you may be invested in more than just U.S. stocks, and that could be why the performance you read about in the headlines may not match your experience. Although the U.S. makes up more than half of the global opportunity set when it comes to stocks, you can also invest in stocks, bonds, and other assets outside the U.S., and diversifying your investments can help reduce the amount of risk you could face if one of your investments underperforms significantly.
When you work with a Savant advisor, your life and financial goals, as well as your tolerance for risk, help dictate how we help you invest. Our goal in diversifying your portfolio is to keep you from experiencing wide swings in performance, in favor of creating a more reliable investment outcome over time.
Headlines Don’t Tell the Whole Story
When you have a solid understanding of the components of your portfolio, you may begin to notice that news headlines don’t always tell the whole story as it pertains to your situation. Your advisor can help you understand the make-up of your portfolio, as well as the best benchmark (or benchmarks) to help gauge your portfolio’s performance.
“The market” is unpredictable. You can expect to see times when a global portfolio will deliver higher returns and occasions when a country-specific portfolio delivers higher returns. Unfortunately, there’s no foolproof way to identify strong performers in advance. That’s why investing in a globally diversified portfolio, and staying invested for the long-term, makes sense. If you had panicked and sold everything in March of 2020, for example, when COVID-19 reports sent the market spiraling and headlines sparked anxiety for investors everywhere, you could have potentially missed out on gains that showed up just a short time later.
Having Perspective Helps
Not everyone has a background in finance or a deep understanding of how the market works. For those who are interested, however, working with a financial advisor can provide much-needed perspective. Headlines come and go but knowing how and when to tune out the noise can relieve anxiety and help you stay on the path to a better investment experience.