Is there something that frustrates you to no end every time you hear it? There is for me. I get frustrated when radio and media commentators report on stock market indexes. You know the three favorites: The Dow, The S&P 500, and the NASDAQ. What do they report? They tell you how many points up or down that respective index is for that trading day.
So here’s a test: If you hear the broadcaster say, “the Dow is up 285 points”…is that a lot, a little, or what? Most people haven’t a clue if that’s good, bad, normal, a record, etc. Furthermore, you don’t invest in points or dollars, you invest in shares of a company. That company’s stock price is represented in points on a particular index. That index is a composite of all the stocks in that index and the points that make up the total of that index represent the total combined stock share price of all the companies listed in that index.
Now comes the fun part on how we can relate back to my hypothetical example of the Dow being up 285 points, and whether that is a something to get excited about. 285 points would actually indicate that the Dow index would be up 0.89% for the day if we based it on the closing index/price of the Dow on 7/21/2022 which was 32,036.90. OK and fine you say…because you feel that your portfolio might be up a little bit.
But now the same media financial commentator moves on to say the S&P 500 index is down 150 points. Is that bad? Well, if you didn’t know how many points the index was to start with, you really wouldn’t have an idea. In this example, if the S&P 500 index was hypothetically down 150 points, that would mean the index is down 3.75%…and that would be a very bad day.
My other pet peeve is with investors who view and discuss their account holdings in dollars instead of percentages. Here’s an example on that. Your friend comes over and says they’ve really done well with this one ‘special stock’ investment. You ask them “how’d it perform?” They tell you they are up by $5,000. So I ask you, reader, is that good? Maybe. What if I told you they started the investment with $100,000 5-years ago and now it’s grown to $105,000. That’s a compound growth rate of just under 1% per year! Not really great…more like a checking account rate. But what if your friend said they started with an initial investment of only $1,000? That would mean they grew at nearly a 38% compounding growth rate every year for 5-years. Now that’s impressive!!
And therein lies my issue with broadcasters across America. “Please stop reporting on points” and instead, tell the listener what percentage the market index is up or down. For you investors that view your individual investment performance in dollar terms, try to start using percentages to illustrate the amount you are up or down in your portfolio or individual investment. That makes it much easier to compare whether one investment has provided a better return than another investment. You could compare a collectible car to a piece of real estate, or a stock to a business endeavor. However, it could even get more complicated when you factor in different cash flows, holding periods, taxes, and liquidity/availability of each investment. That’s when you get into more useful calculations like the Internal Rate of Return.
So next time you hear someone say “the market is up 600 points,” first identify ‘which market index’ they are talking about, and then get your calculator out to divide the 600 by the index value (aka: divisor) to get the actual percentage move for the day. You can thank me when they start to broadcast market performance in percentage points that make sense to everyone. Do your part to help!!