The Surefire Cure for Falling Market Freak-Outs
Jun 22nd 2012 11:39AM
Updated Jun 22nd 2012 4:42PM
Yesterday, stock markets plunged, with the Dow Jones Industrials falling more than 250 points. I can almost guarantee that you either saw a scary headline saying that, or could dredge one up in less than 15 seconds with a quick search.
But as effective as headlines like that can be in grabbing your attention and making you scared, what they don't do is to help keep you from freaking out about your investments. When emotions threaten to overwhelm your better investing judgment, that's when you need to understand something fundamental about the indexes you see reported all the time: They only reflect overall behavior, not individual stock behavior.
Black and white, or shades of gray?
Look at most quick summaries of a particular day's market action, and you'll come away with the impression that all stocks move in line with the market. For instance, if the market falls 2% as it did yesterday, then it's easy to conclude that nearly every stock must have fallen. Sure, some might have dropped more than 2% while others managed to limit their losses to smaller amounts. But generally, you expect stocks to move roughly in lockstep with each other.
Yet, even looking just at a single day, that isn't the case. More than 60 new highs showed up on the NYSE yesterday, along with more than 40 Nasdaq issues, and while more than a few of them were exchange-traded bond funds that don't act like stocks at all, there were still many companies that performed well. Some examples:
- LeapFrog Enterprises (NYS: LF) set a new high yesterday on the strength of announcements earlier this week of its LeapPad 2 and Leapster GS products. The stock has tripled since last summer on the popularity of its educational products, which have left many of its rival toy companies in the dust.
- Airlines have given investors a mixed bag lately, but US Airways (NYS: LCC) soared to a new high. Although pilots at American Airlines decided to take more time to try to reach a new labor agreement, investors still believe that US Airways' bid to take over American will end up passing muster in bankruptcy court.
- Speaking of potential takeovers, merger activity often happens even in down markets. Sun Healthcare (NAS: SUNH) accepted a buyout offer from Genesis Healthcare, sending its shares up 37%.
- Similarly, positive news can come even when markets are plunging. Onyx Pharmaceuticals (NAS: ONXX) found out that an FDA review panel had given a unanimous recommendation to approve its Kyprolis drug to treat myeloma. Even the hint of future good news on the horizon can send shares soaring, as Arena Pharmaceuticals (NAS: ARNA) has seen ever since it got a favorable panel recommendation on its lorcaserin obesity drug last month.
Look at the bigger picture
To be clear, my point definitely is not that you have to find every day's winners before these good things happen to them. Trying to do so would be an exercise in futility. Moreover, any of yesterday's winning stocks could easily give back ground today or next week.
Rather, what should calm you down about these examples is that what really moves an individual stock is the news that has a material impact on its fundamental business, whether it be a successful product or a lucrative partnership. If you can expand your attention to focus beyond just a single day, you'll realize that the market's moves add up to a bunch of noise and often just cancel each other out. Realizing that can give you a lot more confidence even after a tough day and a bunch of alarming headlines.
If you want to keep your cool, the surefire way to stop yourself from freaking out in a down market is to realize that good things happen even on bad market days, and that if you pick the right stocks, you'll benefit from those positive results in the long run. Being patient is hard, but it will serve you well in your long-term investing strategy.
To get more guidance to keep you rational about your investing, let me invite you to read The Motley Fool's special report on investing for retirement. Inside, you'll learn more about adding individual stocks to create a retirement saving strategy you can prosper from. Just click here and start reading your free copy right now.
The article The Surefire Cure for Falling Market Freak-Outs originally appeared on Fool.com.Fool contributor Dan Caplinger never believed that Le Freak was chic. He doesn't own shares of the companies mentioned. You can follow him on Twitter @DanCaplinger. Motley Fool newsletter services have recommended buying shares of Leapfrog Enterprises. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy won't freak out on you.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.