If you’ve been sensitive to the stock market performance in the last weeks, you’re not alone. Regardless of how your investments fare during market corrections, being aware of your anxiety in light of what you’re seeing, reading or hearing can make a difference in portfolio performance. We’ve all done it; reacted either internally or externally when watching the news and the reporter says, “The Dow Fell 400 points today”. But is it a big enough deal that you should react to it?
The relationship between percentage changes and basis points determines the valuation difference in a financial instrument, such as the stock market.
The Basis Point (BPS), is used to calculate changes in interest rates, equity indexes (stock market), and the yield of fixed income securities.
A basis is 1/100th of 1%. In the case of the Dow ‘falling’ 400 points, that would be 4%. As the media reports performance for the day, remember that there are 20-22 trading days each month. Reacting to declining market performance news on one day may cause you to make a premature decision.
In light of stock market corrections, political issues, scandals, and ‘fake news,’ keeping yourself removed from media as much as possible may be healthy for you (and your investments). Every day we are exposed to stories that affect us and our financial decisions. Liquidating your investments in a down market versus waiting for share prices to increase before trading has caused many people to hurt themselves. It is up to you to consider how expensive information may be to you if you react to it.
When it comes your investments, there may be times that your asset allocation needs to be addressed in order for your portfolio to weather market corrections. Adjusting based on short-term performance may not be the answer, but developing an overall strategy is something to consider. If you’re concerned about stock market performance and your overall portfolio, it’s time for us to have a conversation about it. Together we can determine at what time and under what conditions we should be reacting to basis point changes.