The Dow Jones Industrial Average [1] (DOW) shot up 11% (936.42 points) today, roughly representing $305 billion dollars of wealth. While it’s a great day for stock holders that make money when the stock market goes up, what’s more important is how much money we have gained today.
The indexes are great for a quick glance at market performances, but we all know that it’s really the price movements of the actual securities [2] we own that affect us. Those that own Sovereign Bancorp Inc (SOV) definitely know what I’m talking about because it was actually down 3.41% today. Who cares about the DOW [1] that went up 11% when I am down! If anything, it makes me even more angry right?
Let me tell you why looking at the indexes is important. Indices, whether we own ETFs [3] that tracks them or not give us an important gauge in how much risk we are taking!
Take last week for example where the S&P lost 18% and gained 11.58% today. If your portfolio lost much more than 18% last week and gained much more than 11% today, you are taking on way too much risk! My friend used to tell me that if he’s making too much more money compared to the indexes on a percentage basis, he is actually scared! He is frightened because he knows he’s taking on too much risk, and that’s something no one in this market ever needs.
In order to limit the risk we are taking with our portfolio, we really need to make sure the daily performances aren’t way off the performances of the averages. Otherwise, we might be in for a rough ride.