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Measuring Change

Sigma Investment Counselors

March 24, 2017

In the financial markets, change tends to be measured in one of two ways, numerically, that is, the Dow Jones was up 100 points today, or, as a percentage, the Dow Jones was up approximately 0.5%.  While both methods of measurement say the same thing, under some circumstances they may not be immediately seen as being essentially identical.

Consider the potential, short-term reaction to possible, headline seeking media coverage of a future market correction.

Market corrections, defined by Wikipedia as a reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for overvaluation.  Corrections are generally temporary price declines interrupting a longer term uptrend in a market or asset.

Stock market corrections are an inevitable part of investing.  Since 1932, declines of 10% to 20% have occurred an average of every two years.

The issue is not, will we see a correction some time in the future, but how will people react when a 15% correction in the Dow Jones amounts to more than 3,000 points?

Investors should be careful to look at price changes in context.  A percentage price change is equally material if the base is 1,000 or 20,000, but the numerical change can appear to be quite dramatic, particularly if reported in a dramatic manner.

Investment decisions, like many others, generally benefit from a “look before you leap” approach.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®

 

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