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Avoid Investor Whiplash With the Dow Chart Challenge
Up. Down. Up. Down. Stock markets around the world took investors on a roller-coaster ride last month. China’s sputtering economy and slumping currency, the falling price of oil and the rising price of the dollar, were enough to agitate any market. But add to that the latest twist in the ongoing Greek debt drama, the fear that the Federal Reserve will raise interest rates—or that it won’t raise interest rates—and the possibility of Japan sliding back into deflation and it’s enough to give the average investor a bad case of whiplash.
How much of all this is a signal—a real reason to act? How much is noise—random events that have no ultimate effect? And how can investors tell the difference and what should they do?
Match the Year to the Chart
To help you decide, we present the Chart Challenge, conceived by Dave Yeske, CFP, managing director of Yeske Buie, a wealth management firm. The six charts below represent the daily value of the Dow Jones Industrial Average during the latest bull market, from the beginning of January through the end of August for each of the past six years (from 2010 to 2015). Your challenge: Match each chart to its respective year. (The answers are at the bottom of the page.)
Why Things May Not Be So Bad
Did you feel your stomach sinking along with the Dow?
Now take a look at this final chart: It’s an illustration of the cumulative performance of the Dow Jones Industrial Average from January 2010 through the present.
How to Stay Calm in a Stormy Market
The key takeaway from these charts, according to Yeske, is that six or eight or even 12 months is too short a timespan to be able to see what’s really happening. “Short timespans are dominated by random events. You have to pull back and look at a longer timespan before you can see what the real underlying trend is.”
The real trend over longer timespans is always the same, he says: Upward. “This is because the underlying real economy, which ultimately drives what’s going on in the stock market, has a natural propensity for growth, notwithstanding the occasional, and inevitable, downturn.”
The best course of action for smart investors during an up and down market: Build resilience into your portfolio through a diversified mix of global stock and bond funds. Make sure you have an emergency fund to help you weather short-term needs without having to sell your investments during a market downturn. That way, even as the market rides out the inevitable cycles, you’ll be able to maintain your equilibrium.
Consumer Reports has no relationship with any advertisers on this website. Copyright © 2006-2015 Consumers Union of U.S.
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