Would you worry if the stock market closed for five months? It did just that at the outbreak of World War I. I’ll admit, that is over 100 years ago. But what if the market was only open a few days a month? I would guess that after a time, most people would actually worry less than they do now. To see why that is so, let’s talk about what a market is, and what it does for us.
So, we hear about the stock market all the time. Our media outlets seem to yell to us about the Dow Jones Industrial Average and the S&P 500 indexes on a daily basis. However, those are indexes, not a market.
The true definition of a market is a place where buyers and sellers meet to agree on the price and delivery terms for a transaction – the best known being the New York Stock Exchange, which traces its roots to 1792. The NYSE trades in stocks, but there are other markets for stocks, bonds, options, commodities, and many other financial instruments throughout the world.
Let’s also think about what a market is not. It is not a determinant of value. A market only reveals what buyers are willing to pay, and what sellers are willing to accept at one point in time. The actual value of the items being negotiated can be far in excess or far less than the price that is agreed upon.
So why is the definition of a market relevant? It’s all in how we choose to think about the whole concept of a market. The various stock markets, for example, do us an incredible convenience. They provide the opportunity nearly every day to sell shares we own, or buy new shares. The transaction is typically quick, easy, and really quite cheap. Basically, stock markets offer what we call “liquidity,” which is the ability to quickly convert your asset to cash.
In exchange for the convenience of liquidity, we are subjected to the daily drumbeat of good and bad market news, along with favorable and unfavorable valuations on everything we own each and every day. Stock prices in particular can be very close to the actual value or very far from actual value of a company at any point in time. Over longer horizons, they will tend to follow the growth in the value of a company, but in any shorter period they can drift quite a lot.
In contrast to the stock market, real estate transactions are generally not quick, easy, definitely not cheap and, by the nature of real estate, they are local. In other words, liquidity is low in most real estate markets. If the real estate market was more like the stock market, someone would knock on your door each morning offering you a new price for your house. It might be higher than you expect, or lower. If someone offered you a price you knew was too low, would you sell because of the new price? Would you even worry about it? Unless something has changed in the neighborhood, you probably would not give it a second thought. You are likely to wait for a more reasonable offer from another buyer.
The key takeaway is to think of financial markets and investments much more like real estate. Despite the media shouting S&P, NASDAQ, and DJIA indexes at you, the market price of your assets today is only an opportunity to sell or buy, and certainly not indicative of true value. Remember, the financial markets only provide a price and liquidity, which is convenient. But if you have no need for your invested money for several years, you certainly do not need to pay attention to the daily financial news.
So back to the original question – would it worry you if the stock market was closed for an extended time? It should only concern you if you needed the cash during that time. Otherwise, you still own your assets, and the business you own is still operating. Your worrying energy would be better spent elsewhere.
If you want to have a coffee and debate about how long you should go between looking at the value of your holdings, give me a call at 920-617-6830.
Patrick Stoa
This information does not purport to be a complete description of the securities, markets, or developments referred to in this material, it has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Please note that direct investment in an index is not possible.