As investment advisors, it’s a question we hear ALL THE TIME, but it’s really a difficult question to answer.
Friends, family, casual acquaintances nonchalantly ask “so how’s the market doing?” all the time.
It’s really just a conversation starter, but at the core of that question lies a much deeper problem. Very few people are actually looking for the REAL answer to that question, and most people are just looking for a broad response. “Market’s doing well.” “Looks pretty good” — you know, those kind of answers.
If we really took the time to answer that question for them, it would overwhelm a lot of people.
Are they asking about the stock market? The bond market? Just the Dow Jones Industrial Average? The S&P 500, 400, 0r 600? Did you mean the NASDAQ? Should we dive into different investment factors? Momentum? Value? Or did you just mean the stocks in your account?
We can’t really answer the basic question “how’s the market?” with something like that without sounding snobby or rude, but it really is hard to answer without more context.
In Ep. 217 of the Mullooly Asset Podcast (listen here), I talked with Tom about how the phrase “the market” causes more problems than it solves.
STOCKS SOAR AS MARKET GAINS 400 POINTS! or MARKET TUMBLES DOWN 300 POINTS!
Individual investors flip on CNBC and either get flooded with information, green or red numbers depending on the day, and have emotional reactions to what happened. It’s human nature. I get it. However, it stirs up some emotionally-driven phone calls.
“I see the market has been up the last week, and my account isn’t doing much. Are we doing something wrong?”
We constantly explain to clients, yes the Dow Jones has been up for a few days, however the Dow Jones is only an index of 30 stocks in the United States market, and unless you own JUST THOSE 30 STOCKS, you should not expect your account to mirror what that specific index is doing.
There is an infatuation in the financial media with the Dow Jones, and I understand that it has always been that way, but I question why?
It would better serve individual investors to have headlines like “30 STOCKS IN DOW JONES WENT UP 300 POINTS TODAY”, but that’s not as catchy.
Behavioral finance has become such a big part of being an investment advisor, and many advisors have begun to coach our clients and prospects on the right ways to behave with their investments and their finances.
It’s imperative that advisors educate their clients on the differences between what gets reported in the news, and what is actually happening in their account. That can happen two ways:
- Advisors educate their clients on how to properly read and take in financial news, and how to understand their own emotional reactions to that news.
- Advisors need to have clear, concise conversations with their clients about what exactly is in their portfolios, and what to expect throughout the process.
These steps are mutually beneficial to both the advisor and the client.
The client will better understand what is happening in their account, be better in tune with their emotions when they read the headlines, and be able to work on reacting the right way to those headlines.
The advisor will have happier clients who understand their process, and will be less bogged down with client phone calls every time CNBC flashes red numbers on the screen.