Investing Basics: 3 Charts the Little Guy Needs to See
The stock market can be a very dangerous place for the average investor. When times are good and stocks are rising, investors feel too clever for their own good and enter a state of euphoria. When stocks decline, people often hold on in disbelief until they sell at the worst possible moment — the bottom. However, knowing your financial goals and having a plan can dampen the emotional turbulence.
Investors should familiarize themselves with Mr. Market, a character Berkshire Hathaway’s Warren Buffett introduced to readers of his annual shareholder letters nearly 25 years ago. Mr. Market is the mental attitude toward market fluctuations. He is reliable in the sense that he appears daily to provide market quotations, but his mood is anything but reliable. If Mr. Market were a real person, he would have a prescription for every bipolar pill under the sun, and it still wouldn’t be enough.
If allowed, Mr. Market will boss investors around on a daily basis. Sometimes he feels euphoric and names very high prices for stocks. At other times he becomes the ultimate pessimist and names very low prices. This has been demonstrated this week as major indices like the Dow Jones Industrial Average and S&P 500 sold off on Thursday after strong gains one-day earlier. Fortunately, Vanguard offers some simple ways to keep Mr. Market from interfering with long-term returns. Let’s take a look at three charts that the average investor needs to see.