The Most Important Lesson From the First Week of 2015
Even amid market volatility, investors can stay calm and focused. source: Hartwig HKD , via Flickr.
The first five trading days of 2015 have been especially tumultuous, with all but one involving triple-digit moves by the Dow Jones Industrials . Yet amid all the apparent chaos, long-term investors can take a lesson from the market's behavior so far in the new year -- and if you pay attention, you can use that lesson to gain valuable perspective for the rest of your investing life.
What today's market action really means
Investors in the stock market became accustomed to volatile movements both upward and downward toward the end of 2014, and the markets have gotten even choppier this year as traders struggle to figure out whether the future for stocks is bright. The Dow hadclimbed more than 280 points as of 1 p.m. EST Thursday as market participants apparently grew more comfortable about the same concerns that had caused them to panic just days before. When you add in Wednesday's 213-point spike, the Dow has completely reversed its losses from the opening sessions of 2015 to give investors a slight gain for the year.
Source: Eric Chan/ Flickr .
That experience will play out countless times over the course of your investing career. You can always find seemingly reasonable explanations for daily moves in the markets. For instance, the most popular rationale for today's activity comes from low inflation rates in the eurozone, which many believe will force the European Central Bank to take dramatic measures to spur economic growth in a fashion similar to the Federal Reserve's asset-purchase program of recent years. Given the upward push that U.S. stocks got from quantitative easing, investors hope to see a similar result in Europe, and that helped push stocks around the globe higher. Other investors pointed to stability in oil prices as a factor in the upward movement in stocks.
The problem, though, is that Europe's economic condition and the likelihood of ECB policy moves have not dramatically shifted today compared to three days ago, when the Dow plunged more than 330 points. On that day, market watchers blamed the decline on the drop in the price of oil to just below the $50 mark, and many cited concerns about Europe's economic instability as contributing to the decline. With the price of oil actually lower now than it was on Monday, it's hard to understand why oil would be used to explain both moves.
Source: Flickr user Jim Linwood.
One way to keep from getting jostled back and forth by changing public opinion is to take a view that goes beyond the day's development. Even pulling back to a one-week view will give you a much different angle on the market, as volatility fades to noise and you can see broader trends more clearly. Put one way: stocks have opened 2015 on a resilient note as investors set aside short-term fears and rode the 6-year-old bull market higher. That perspective looks a lot different than the rocky ride those who follow the market every single day have seen.
Keeping an eye on daily movements in the stock market can be useful in order to stay abreast of important developments. But giving too much weight to day-to-day developments is counterproductive. Often, the market will turn on a dime and reverse course quickly, whipsawing those who try to play a short-term trading game but leaving longer-term investors who have the courage of their convictions comfortable that they can weather whatever short-term storms stocks will inevitably face.
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The article The Most Important Lesson From the First Week of 2015 originally appeared on Fool.com.
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