The Standard & Poors 500 index (SP500) has risen steadily for the past five years, until it took several sharp drops starting in early October. The SP500, which tracks overall stock market activity, is an index made up of 500 of the largest companies representing the wide spectrum of American commerce.\u00a0According to Bill Schwert, Distinguished University Professor and professor of finance and statistics at the Simon Business School, the SP500 tells us something about people\u2019s confidence in the economy. But he advises investors to \u201ctake a long view.\u201d<\/p>\n
All calculations below were valid as of October 25, 2018.<\/em><\/p>\n One thing I can say with certainty is that stock prices do not always go up (or down).\u00a0My best advice to investors is to take a long view when investing in stocks.\u00a0You should not think about selling in reaction to recent decreases (or increases) in stock prices.\u00a0The evidence is fairly strong that it is very hard to time future movements in stock prices.\u00a0Following a passive buy-and-hold strategy will save transaction costs and capital gains liabilities in most cases.\u00a0After all, the Standard & Poor\u2019s 500 portfolio has increased 56 percent in the last five years, and that does not include the dividends received by stockholders over that period.<\/p>\n Most daily commentators describe theories for why stock prices moved that are either tautological (\u201cbuyers out-numbered the sellers\u201d) or inconsistent from day to day (for example, attributing price moves to good or bad employment news).\u00a0The market is much too complicated to be diagnosed on a daily basis by these kinds of simple descriptions.\u00a0On the other hand, there is a large demand for simple stories and the news media usually seek to deliver stories that meet that demand.<\/p>\n I think the most important concept that investors should focus on is the benefit of diversification. Most people are interested in identifying a small number of stocks that will be winners in future periods.\u00a0It is very hard for anyone to accomplish this\u2014and it is impossible for all investors to do this at the same time.\u00a0Nevertheless, most people enjoy reading and learning about individual firms, or even industries, to try to identify stocks that will be great investments for the future.<\/p>\n Instead, following a buy-and-hold strategy (buying or selling very infrequently) in a low-cost, well-diversified mutual fund or exchange-traded fund will deliver better long-term performance. The risk will be much smaller and there will be no loss of expected returns.\u00a0The only downside is that you will not find interesting stories to read about related to your investment portfolio.<\/p>\n The Fed and the federal government certainly create the environment in which firms operate.\u00a0Tight credit markets raise the cost of borrowing to finance business expansion.\u00a0Tax and regulatory policy certainly affect the profitability of business plans.\u00a0Perhaps most importantly, uncertainty about future government policies can stifle firms\u2019 willingness to make large investments.\u00a0 My best guess about the reason that stock prices have risen in the last couple of years is that firms and investors are optimistic about future tax and regulatory policies and their effect on future risk and profitability.<\/p>\n","protected":false},"excerpt":{"rendered":" How concerned should the investing public be about recent downturns in the stock market? While daily fluctuations make for interesting news stories, Simon Business School professor Bill Schwert advises investors to \u201ctake a long view.\u201d <\/p>\n","protected":false},"author":16,"featured_media":349472,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1,29212],"tags":[8916],"class_list":["post-347922","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized","category-voices-opinion","tag-economy"],"acf":[],"yoast_head":"\nHow concerned should the investing public be about the recent downturn? <\/strong><\/h3>\n
Market analysts routinely give reasons for market fluctuations. How accurate are those analyses?<\/strong><\/h3>\n
If investors shouldn\u2019t react to periodic downturns, what should guide their decision making instead?<\/strong><\/h3>\n
How much influence does the Federal Reserve\u2014or the president\u2014have on the stock market?<\/strong><\/h3>\n