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Big Round Numbers and All-Time Highs
With all three major indices (the S&P 500, the Dow and the Nasdaq) continuing to rise, we thought we’d take a look at a couple of odd investing topics that often show up in conversations around the old BBQ grill on weekends. Well, maybe not often…let’s say occasionally…OK, it rarely happens, but at least you’ll be ready to join in the conversation if you keep reading!
1. Big round numbers in the stock market catch everyone’s eye. Whether it’s a single stock (like Apple reaching $100 a share) or an index (the Dow reaching 17,000), something about those big round numbers gets folks’ attention. When a milestone is reached, it’s usually big news and we hear a lot about it.
This “phenomenon” is not just related to the stock market. “200 days without a workplace accident,” “1,000 burgers sold,” “our 30th wedding anniversary”: we see milestones like these in our everyday lives that, for some reason, stand out. Why? Is it a cognitive recognition thing (yeah, we’ve been watching PBS again)? Or are our brains just wired to place some kind of significance on fat numbers? It’s strange, huh?
Are big round numbers important? Well, in the case of that 30th anniversary, yeah - that is, if you guys value your lives! You may have forgotten 28 and 29, but you’d better not forget 30!! Are big round numbers in the stock market important? Not so much.
When the S&P 500 hit 2000 for the first time back on August 25, it was all over the news. But in and of itself, the number meant little. Stock valuations didn’t jump. Volume didn’t explode. The VIX (the “fear index”) hardly budged. It was a ho-hum day in the market.
For some investors, however, big round numbers are important…because they are lazy. Instead of doing a little chart research to locate areas of support and resistance, they will use big round numbers as their buy or sell signals. They will say something like, “Well, when the Nasdaq reaches 4,000, I’m getting out of the market.” Or maybe you’ve heard this one, “If my XYZ stock ever hits $100 a share, I’m selling it all!” Why? Who knows, it’s just a big round number thing we guess!
As trend followers, we don’t place any importance on these big round numbers. What we do place importance on is how the market reacts when it reaches them. Is there enough selling to put a damper on the uptrend at that level? Is there enough buying to push the trend on up through that level? Like all market “events” we pay more attention to the market’s reaction than to the event itself.
That brings us to another little oddity concerning the markets and investing:
2. All-time highs in a stock, a mutual fund or a market index scare the doo-doo out of some investors. We know you’ve heard this comment, “We’re in a stock market bubble - there’s no way it can go higher.” Or, “My ABC stock just hit an all-time high - I’ve got to get out!” And one of our favorites, “This ETF just hit an all-time high - I’m scared to buy it now.”
While it pays to be smart when investing in or holding on to extended bull runs, all-time highs are only all-time highs until prices move higher. If no one ever bought highs, the S&P would still be at its 2009 low of 666. Apple would still be a $22 stock! We wouldn’t need our 401(k)s - we could just stuff money in a mattress!!
As with big round numbers, the only thing trend followers watch when it comes to all-time highs is the market’s reaction to them. We can’t see pretty easily on the charts if those highs mark the end of a trend or just another high, then act accordingly. The high itself does not cause us to panic.
Big round numbers and all-time highs are good for one thing: bringing out investors’ emotions! Try not to let those events bring out yours - trust your charts, don’t panic and above all else, don’t forget that 30th anniversary!
NEWS YOU CAN USE:
"Fewer Americans Have Retirement Accounts,
New Study Says"
"Fed: U.S. Consumers have Decided to Hoard Money"
"Your 'Safe' Money Market Fund May Be at Risk"
"Biotech ETFs Show Robust Health in August"
from Investor's Business Daily
"More ETF Closures:
iShares and PIMCO to Shut 22 Funds"
VIEWS YOU CAN USE:
"A Portfolio for Paupers: Investing When You're
Short on Time and Money"
from Financial Post
"Index Investing Still Wins in Emerging Markets"
"What Retail Investors Can Learn from the Smart Money" from The Globe & Mail
"Confessions of an Index Investor"
"3 Ways to be a Better Investor You Won't Learn in a Book"
from Daily Finance
The days are already getting shorter! We hate to see the summer end, but at least it will give us a bit more time to catch up on our reading...
Now, these books won't make you "get rich quick," but they'll definitely help build the foundation you'll need to "get rich slow!"
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Here are a couple of very simple retirement calculators courtesy of our friends over at Calculator Pro.
Here are the figures we used:
> Required Annual Income: we put in what we're making now (we don't buy into that "plan to spend 70% of your working income in retirement" idea!)
> Years until Retirement: we shot for age 65, but who really knows, right?
> Years after Retirement: we sure hope to have 20 good years of doing what we want to do!
> Annual Inflation: we used 3.5% (maybe go a tad higher to be safe?)
> Annual Return on Balance: we used 7% (maybe go a tad lower to be safe?)