Three Ways the Stock Market Can Affect Your Portfolio
If you’ve been following the stock market for the last year or so there have been a lot of ups, and a lot of downs. Last year ended up, as far as the indices are concerned, quite a bit higher than I think many anticipated. Especially with regards to the impact of the Coronavirus pandemic earlier in the year. So, what does it all mean?
While there are many variables to keep in mind when it comes to looking at the stock market and your portfolio, here are three things to keep in mind.
Be wary of frothy stocks.
Frothy stocks seem to be almost parabolic in terms of their ascension. They typically grow at great guns way above where normal market performance is. It doesn’t mean that they’re bad companies. It doesn’t even mean that they don’t deserve it. Just be wary of them because even if they are on that kind of trajectory, they can’t keep that pace in perpetuity. Be mindful of them as you are doing your analysis.
Understand how the various indices are put together and how they move.
When you’re looking at the most popular indices out there, the Dow Jones Industrial Average, the S&P 500, the NASDAQ, the list goes on, it’s important to understand how they are put together and how they move. For example, the Dow Jones Industrial Average is price weighted which means a more expensive stock is going to move the Dow more. The S&P 500 is market-capitalization weighted which means a bigger company will move the index more than a smaller company.
It’s important to keep these things in mind because you may say, “The market is up today.” Well, it may be, or it may be that a couple of the bigger companies, more expensive share-price companies, are moving and covering up other stocks that aren’t doing as well.
Be aware of companies that are doing well, covering up those that aren’t doing as well.
Continuing from point two, we saw this last year. Even though the indices, almost across the board, had some significant appreciation last year, a lot of those indices were hiding a host of companies that didn’t really do well. It doesn’t mean the market is in a bad place. It doesn’t mean that those companies who did well didn’t deserve it. It’s important to understand what may be the ratio of companies that did well to companies that didn’t do well. This helps give you an understanding of what’s happening in the overall market.
This requires you to pull the layers of the onion back a bit but it’s an important thing to do when you are looking at your portfolio in relationship to the market.
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These Blogs are provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of SagePoint Financial.