Investing is about the long term. Forget about the short term.
As an investor, you think in years and decades. Not in days. Leave the short term to professionals and fools. For short term traders, who think in hours and days, markets are risky, volatile, and brutal. For long term investors, who look at markets in years and decades, they are a lot more peaceful and smooth. The short term is, for all but a few of the best traders globally, a losing business. The long term is, in average, a profitable business for everyone. Let’s see what I mean by this by looking at the daily, monthly, quarterly, and yearly returns of the S&P 500, the most used American stock index which is the total of the 500 largest public companies in the US, over the period 1926–1918 :
We see that on a daily basis, half of the time the stock exchange is up, and half it is down. So tomorrow it has about a fifty/fifty, a coin flip, chance of being up or down. And no one really knows whether it will be up or down.
Let’s look at monthly returns however: we now see that 63% of the time monthly returns are positive, and 37% they are negative. Two thirds of all months are positive, and only one third are negative.
Now let’s look at yearly: we now see that 74% of years are positive, and 26% are negative. So over a long period of time, every 7–8 years of 10 tend to be positive, and only 2–3 tend to be negative.
What is your investment horizon? Years and decades. Therefore which of these stock market trends do you care about? Of course the yearly returns, the vast majority of which are positive. Now I know, you will tell me that financial newspapers, newsletters, websites, keep bombarding you with what the stock market did yesterday or today, and also why it did it. What is this for a long term investor? Distractions and garbage. You don’t care about daily returns because you are a long term investor, and I promise you that no journalist/economist/investor knows why the stock market does what it does every day.
In addition to the fact that over longer periods of time, the stock market tends to be positive more often than negative, it is also smoother. What do I mean by this? The market tends to vary a lot more from one day to the next, than from one month to the next. So if you follow the market returns every day, you will see a lot more variance and volatility, than if you only look at it every month. When you check what the markets do less often, you also see less movements, less noise. I calculated the annualized volatility of the SP500 from daily returns, and from monthly returns for 90 years, from 1926, to 2016:
Annualized daily volatility: 12.2%
Annualized monthly volatility: 9.4%
As I explain in my post on volatility, this is simply a measure of how much the stock market changes from one period to the next. It changes more on a daily basis, than on a monthly basis: it is a lot smoother from month to month, than from day to day.
p.s. and if you look at the S&P 500, you will find a lot wilder ups and downs intra day by the hour (during a single trading day), and even wilder by the minute or second.
Do I follow the markets? Yes. I am signed up to a newsletter or two (Investopedia is quite good for example) and I check the highlights daily. But this is because I work in this field and out of sheer curiosity — I scan through daily headlines and almost never read more into them.
The last thing you should do is make your first investments, and start following them daily — as you saw half of the days they will probably be down/negative for you. My advice if you are not an active trader, is to:
- keep up with the economy news. A newsletter like Investopedia’s is very good. But read only the highlights/titles, and more only where the specific news interests you more. Do this for general interest. And whenever someone explains why the stock market went up or down or sideways, laugh to yourself at how foolish this person is — remember that other than exceptional single events like 9/11, no one knows why the stock market does what it does.
- unless you are an active trader or simply enjoy doing this, try checking your investment portfolio once a month or less often. Tend to your family, your garden, your hobbies, and don’t waste time checking your portfolio daily. It doesn’t matter what your stocks did today or tomorrow — over the long term the stock market will probably go up, and this is all you care about. The short term is noise.
What did we learn here?
Stock market returns tend to be a flip of a coin on a daily basis. Half of days the stock market is up, and half it is down. However when we put a monthly lens on, things get a lot better. Almost two thirds of months the stock market is up. And things are even better on a yearly basis, where in general, over the past 90+ years, the stock market was up 75% or three quarters of all years, and down only one quarter of all years. Not only is the stock market more often up as you look at it over longer periods, but its returns are also smoother, more stable, changing less. This is why investors should ignore short term movements in markets i.e. daily movements, as pure noise, and focus on months, years and decades.
