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The most common question asked of me these days is when the markets will bounce back. Even with numerous issues plaguing the everyday lifestyle of the average American (debt, housing, and jobs to name just a few), the strength of the markets, in
particular, that of their retirement plan, is still weighing heavily on their minds. While such focus and energy would have better used in the years prior to the current downturn, it seems to be a measure of confidence that things will get better.But tying your mood to such fickle places as the market can be difficult at best. What we hear on the evening news and through web reports on the subject is a daily moving number, sometimes up and just as often, down. But like all measures, it depends how much on where you stand as to what you see.
To simply look at the popular Dow Jones Industrial Average (a grouping of the largest industries in the US and representative of those industries) is not enough. Although when hear those numbers, they can offer hope and despair, and lately, at the same time. Knowing that the value of the Dow is down significantly from its plus 14,000 point high last year to its recent rebound to over 8100, gives the average sideline viewer hope while at the same time, dashing that hope.
But a lot goes into the making of those numbers and the theory of how long it will take this index to get back to even. Dividends play a role in how the index performs but does not show up in the index's number. Just about every member of the Dow has cut its dividend as its share price fell. This keeps the percentage of shared profit (what shareholders get in return for holding the stock is a portion of the profit, calculated as yield and divided into the share price - a $1 dividend on a $20 stock is a 5% yield). Sometimes, the drop in the DJIA does not stop the dividend payment from dropping. This increases the value of the stock even if the share is worth less - in the index.
Deflation (a decline in prices because folks aren't spending and credit is too tight to use borrowed funds to buy products) or inflation (the effect of a currency being worth less than the goods it previously purchased) can have an effect on the index but it doesn't show up in the number.
And because the Dow represents only 30 companies, it is not often indicative of the market as a whole. And because the Dow changes over time, with new companies being added while older ones are deleted from the index. One of the biggest gaffs the DJIA ever did was removing IBM, which while it was absent, performed better than the 30 in the index.
So when you hear that the market is down, don't fret. It will recover. If it does so in an historical fashion, it could take as little as four years to regain its former glory and as long as eight. But rest assured, these are simply efforts at looking back, adding in some often excluded facts and mixing it in with a little hope.
Which is why many folks who ask what they should do often here me say - do nothing but focus on fees and expenses.
