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The Danger of Acting on Stock Market Headlines

Nest EggOver the past five years, U.S. stocks have tripled in value. For example, the Wilshire 5000 total return index increased from 27.50 to 82.62. Yet paranoia about the market has caused many investors to miss out. The chart below shows the return an investor would have received just by owning a total U.S. stock index fund and reinvesting the dividends. A total U.S. stock index fund essentially owns every publicly held company based in the U.S. Though the chart tracks a Vanguard index fund, other fund firms such as iShares, Fidelity and Schwab have similar offerings.

Looking at the so called "plunge"

Looking at the so-called plunge


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While stocks have rarely risen so much so consistently over a five-year period, you’d never know that by reading some of the headlines during the same period. Here are just a few from outlets including the New York Times and CNN Money.

These headlines, combined with market commentary claiming to know the future, are enough to scare anyone into avoiding stocks. Just recently, on Feb. 3, some headlines read “Dow Down 1,200 Points,” referring to the year-to-date decline as a “market plunge.”   The decline relative to overall performance over the past five years is barely a blip in the graph, and the market quickly recovered.

My advice is to ignore media headlines, market commentary and predictions of the pundits. Headlines are meant to grab your attention, yet typically predict the past.

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Timing the market has a long history of failure. Data from Chicago-based Morningstar reveal that individual investors typically buy when stocks surge only to sell when stocks plunge. Five years ago, when stocks were on sale, investors were fleeing stock mutual funds and exchange traded funds (ETFs), which are similar to mutual funds. So-called retail investors started moving money into stock funds only in 2013, after stocks had hit an all-time high.

Invest in stocks only if you are willing to stay for the long run, which I define as at least 10 years.

Photo: jtyler/istockphoto

Graph: Allan Roth with data from Yahoo Finance 


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