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Financial markets

As an investor, you'll probably be a little more interested in what's going on in the markets and how it could potentially impact your portfolio.

POINTS TO KNOW

  • The main markets you'll hear about are stock markets, but bond markets are sometimes newsworthy as well.
  • If you own a generous portion of stocks, you'll probably see a correlation between the behavior of the stock market and your account balance.

What's a "market," anyway?

While listening to business reports on the news, you might hear something like, "The markets were up today" or "A market plunge continued for the third day in a row." What does this mean?

"Market" is a term that, loosely defined, means "the buying and selling of related securities." You could talk about "the stock market" and mean "all stocks traded in the United States," for example.

Most excitement—and fear—relates to the stock market because stocks can increase or decrease in value very quickly. But there are bond markets too.

If you own a broadly diversified portfolio that includes stocks from all segments of the U.S. market, increases in the market will likely translate into increases in your balance. Of course, the reverse is also true.

It's the relationship between what's reported on the news and what happens to your personal finances that makes following the markets so irresistible.

But don't get too caught up in day-to-day financial market news. Over long periods of time, ups and downs tend to smooth out.

Go in-depth

Read our white papers delving into specific trends in the global economy.


WATCH AND LEARN

Is "running for the hills" a good investment strategy? When things aren't going so well, is it smart to make some moves with your portfolio?

Read a transcript

Why invest in a country that's poised for sluggish growth? It all comes back to the relationship between risk and return.

Read a transcript

What are the biggest threats to the world economy today? In this webcast from December 2015, our chief economist looks at what might be ahead.


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REFERENCE CONTENT

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How to handle a market downturn

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Why economic growth and market growth are not the same

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Stock

Usually refers to common stock, which is an investment that represents part ownership in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits.

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Bond

A bond represents a loan made to a corporation or government in exchange for regular interest payments. The bond issuer agrees to pay back the loan by a specific date. Bonds can be traded on the secondary market.

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Diversification

The strategy of investing in multiple asset classes and among many securities in an attempt to lower overall investment risk.

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Portfolio

The sum total of your investments managed toward a specific goal.

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How to handle a market downturn

Gary Gamma: Well, not surprisingly, I think we have a follow-up question that kind of pertains to the first question you answered. And it comes from Sandra in Lexington. "Should we be making portfolio adjustments right now with the recent downturn in the market?" What would you say to that?

Nathan Zahm: Yeah, you know, I think the initial reaction, particularly when markets are a little more turbulent, is to feel like you need to do something. And a lot of times if there's something else in your life that isn't going the way you want it to, you feel like you should take action.

That's not really the case with investments, though. By taking action, you're just exposing yourself to more risk and the potential downside is much greater than if you had just stayed the course. And, ultimately, that is going to be your best strategy. You pick your strategic asset allocation, the right mix of stocks and bonds for you given your investment horizon and your risk tolerance, and you stick to it. I think you said it best. Don't look at your balance daily.


Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

© 2014 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

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Why economic growth and market growth are not the same

Liz Tammaro: So we talked about the diversification benefits, but with foreign economies not performing well or the perception that they're not performing well, why would somebody want to invest in something that's not going to be valuable or add value to the portfolio? Andrew, what are your thoughts on this?

Andrew Patterson: So I think the first thing you need to do there is address the perception that people have that the growth necessarily determines equity returns. So a lot of individuals will talk about, "Well, expectations for growth internationally, they're shaky; they're low, so that means the equity returns are going to be low." Well, that's not necessarily the case.

If my expectations for growth in the euro zone, let's say consensus is somewhere around 1.5% for 2015, and euro zone actually turns out to grow around 2%, well, that's actually a positive event for equities, potentially in the euro zone. Whereas, in China, their growth is expected to be around 7%. Let's say they grow at 6.8%, right. That 6.8% is still greater than the 2% that the euro zone was growing at, but that might actually be a negative event for Chinese equities because it's actually grown less than expectations.

A lot of times, we find that expectations for growth are already baked into equity prices. So it's not so much the growth that's realized, but it's those unexpected shifts in growth, which are, by nature and by their name, unexpected. So this all goes back to the diversification argument and why it pays to hold a wide array of equities, of bonds, of countries, of industries, what have you.

Scott Donaldson: It's funny, and it's kind of the way in such that the investment markets work is you're potentially paid for the amount of risk you take. So when we say bonds or stocks in country X, we don't think they're going to do very well because there's problems over there and so forth, well, the equity markets and the bond markets, in the prices, are reflecting those negative outcomes going forward.

So, theoretically, depending on what price you pay for the forward-looking earnings and investments, ultimately, can be very, very positive and unexpected for many, many people because the risk is there, and you're being paid for taking on that risk.

Liz Tammaro: So if you get a good price per se, right, a good deal in purchasing some of these securities, which they may be discounted if there is the perception of risk around them and there are upside surprises, then that could be a good thing for your portfolio.

Scott Donaldson: Correct.

Andrew Patterson: Absolutely.


All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Investments in securities issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

This hangout is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.

© 2015 The Vanguard Group, Inc. All rights reserved.