It's easy to get trapped in the news headlines telling you what the market is doing today. However, the most successful investors have learned to tune out the day-to-day market "noise" and focus on the big picture.
Some news stories are important, such as earnings reports, but for the most part, small up and down moves in the market are insignificant to your investment strategy.
News you should care about
Basically, the only stock market news you should really care about is company- or industry-specific news that can change your investing thesis.
For example, if you own individual stocks, it's important to pay attention to the earnings reports of the companies you own. If a company has declining sales, or is shifting its strategy, that is information that can (and should) influence your decision on whether or not to remain invested in the stock, or to buy more shares.
Or, if oil prices are dropping like a rock, as they have been lately, it can change the way you feel about your investments in the energy sector.
However, daily market fluctuations, even big ones, shouldn't really affect your overall attitude toward your investments, and can actually set you up to fail.
Never try to time the market
It is almost always a mistake to try to time the market. What I mean by that is, just because the market is near record highs right now doesn't necessarily mean its due for a pullback and you should sell.
If the market, or an individual stock, drops for a few days in a row (especially in a volatile manner), it doesn't necessarily mean it's time to buy. There is a phrase "don't try to catch a falling knife" that basically means stocks that have dropped dramatically have done so for a reason, and are likely to fall further before rebounding.
Buy when stocks are expensive, and buy when stocks are cheap
Instead of trying to time the best possible entry and exit points, you should put the principle of dollar-cost averaging to work in your portfolio. Basically, dollar-cost averaging means that you should invest the same amount of money when the market looks expensive as you would when the market looks cheap.
Let's say that a stock you have your eye on trades for $50 now that the market is looking a little expensive. Well, if you invest $1,000 right now, you'll buy 20 shares.
If the market corrects and the stock drops to $40, by investing another $1,000 you'll add 25 shares to your position. So, you end up buying more shares when the stock is cheap and less when it's expensive.
Your average cost per share will be lower than the average price of the stock. In our simplified example, you would have spent $2,000 for 45 shares of stock. Even though the stock's average price was $45 during the two times we bought shares, your average cost per share is $2,000 divided by 45, or $44.44.
In a nutshell, dollar-cost averaging allows you to take advantage of bargain prices in the market without the inherent risk involved with trying to time the market and investing all of your available money at one time.
Watch the news, but keep your goals in mind
It is definitely important to keep up with the news and to know what's going on in the world. The more information you have about the current economic events, the more informed you'll be as an investor.
My point here is that you should try to filter out the daily market "noise," or day-to-day fluctuations in stock prices that really have very little to do with a solid long-term investing strategy.
Daily price moves are best left to day traders, stockbrokers, and other investing professionals. For retail investors, if you keep your eye on your ultimate investing goals and buy and hold quality stocks, your long-term investment performance will take care of itself.
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