Today, while I was watching the pre-market opening for stocks on TV, my wife sat down and, as she divided her attention between her iPad and the TV, she commented that Netflix was at 105. Now, that surprised me since we do not own any of that stock. So, I asked her: “As compared to what?”, and she just shrugged her shoulders.
This brings up an important point. Many novice investors only seem to think about the markets on an occasional basis. Maybe they heard or read that the Dow Jones dropped by 200 points, noticed that the value on their monthly account statement had declined, or read that a stock or mutual fund they own had dropped. But, in order to actually understand what is happening in the financial markets, you need to place things in context. How does what is happening to one of the securities you are interested in compare to other companies within its industry and, then, how does that correlate within the overall market?
A good way to begin to understand what I am suggesting is to become familiar with the “Sector Tracker”, on the linked Sector SPDR web site: http://www.sectorspdr.com/sectorspdr/tools/sector-tracker. Sector SPDRs are exchange-traded funds (a form of mutual fund) that segregate the various stocks within the S & P 500, by their various industries. The Tracker is inter-active, and it allows you to click on the various timeframes, and to review the historical performance of the S & P 500, as well as each of the individual sector ETFs.
As you consider the possibilities, try to understand what caused the overall index to perform as it did, and also why one sector has performed differently than another. Also, remember that this chart shows past performance, and it does not attempt to reflect what will happen in the future. But first, let’s consider the S & P 500 across, let’s say, the one month, one year and five year timeframes. That performance was: -4.35%, +2.48% and +89.96%, respectively. Well, about a year ago, anticipated weakness in developing markets raised some concern within developed economies, as well.
Now review how the Energy and Materials (Commodities) SPDRs did at the time when, over the past year, the prices of copper, gas, zinc, oil, etc. have plummeted. Within the Health Care sector, stocks have held-up comparatively well, because Baby Boomers are getting older and more people now have acquired health insurance under Obamacare. And lastly, the Utility industry, which generally maintains a debt-heavy capital structure, has benefitted from the Fed’s holding interest rates down for quite some time.
When you consider the vagaries of the financial markets over time–among the different industries, or with any particular stocks or funds–you might begin to question your past investment moves. For instance, why didn’t you sell-out before? At least, part of it? Should we have shifted into better performing sectors? Moved more into bonds?
Before you even start to invest, try to learn, at least the basics, so that you will have some concept for making suitable investment decisions. And also, you cannot go back in time! So, if you did liquidate your portfolio to any great extent, how will you know when it is time to re-enter the markets? As many people–especially retirees--who panicked back five-to-seven years ago have found, cash and CDs are still earning virtually nothing. Unfortunately, cash and equivalents will not keep up with inflation over the long-term!
Remember that there can also be much more to investing than just what is going on in the U. S. markets, and you cannot possibly be aware of–or truly understand–all of the extraneous factors. Is OPEC opening or closing the oil spigot? The intricacies of the foreign currency markets? The Chinese stock market bubble? What’s going on inside the head of North Korean Dictator Kim Jong-Un? Even the partisan bickering on Capital Hill? But, don’t feel alone if you feel lost, the Media certainly doesn’t have a clue either!
NOTE: If you are committed to learning a little more about the investment basics, you might consider checking the Investment Boot Camp (IBC) series on this blog. For many investors, the current markets are somewhat of a Baptism by Fire! For our overseas readers, much of what I am suggesting would also have similar applications for your markets, as well.