How do world events affect the stock market? And what does that mean for investors?

Jan 23, 2015 | BDE, Investing

A number of factors, including lower costs of trading and the increase in high-frequency trading, have helped create a “new normal” for the financial markets in which greater volatility is expected. With that said, there will still be events in our country and around the world that ripple the stock market, so on some days we see more market movement than on others.

For example, data from 1950 through 2014 (on the S&P 500, an index that commonly serves as a benchmark of the US stock market) show that there was market movement of at least 1% up or down on an average of about 51 days per year. We saw a market movement of at least 1.5% up or down on an average of about 23 days per year during the same time period.

In short: the stock market is not suddenly volatile just because there’s concern in the news about world events. Do not confuse the short-term behavior of the market with the value of strategic long-term investing. When we look at the markets close up, we see a great deal of volatility. It is the wide-angle, panned back view that serves long-term investors. With this perspective, it is possible to see that the long-term trend is positive. That upward trend is why investing wisely is such a powerful means of wealth creation. The difficult part is a matter of personal discipline: the ability to tune out market noise, stay the prudent course, and allow your wealth to grow over time.

A wise investor invests in a globally diversified portfolio of stocks, bonds, and commodities. Decide on an asset allocation that makes sense based on your overall investing strategy. That investing strategy in turn is tailored to your long term financial goals, as well as the other considerations that make you unique as an investor: your current financial situation, your risk tolerance, your spending needs, your time horizon. With a balanced, diversified portfolio, along with the discipline and patience to wait out short-term volatility, an investor can do very well in the long term.

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