How to Understand Market Fluctuations

The stock market rises and falls, but over the long haul the value of the market tends to rise. What's up with the fluctuations?

Instructions

Difficulty: Easy

1. Know that the stock market is bound to fluctuate. But over the past century, a random collection of stocks would have appreciated in value by nearly 10 percent annually.
2. Realize that market downturns can be triggered by a number of events, such as rising interest rates, concerns about labor shortages, and changes in the political or business climate.
3. Understand that when interest rates rise, investors tend to pull money from stocks and put it in interest-bearing investments such as bonds.
4. Know of current shortages in the labor market can also hurt stock prices. As a result, when the unemployment rate rose in spring 2000, markets rose, as if rising unemployment were good news.
5. Consider that politics also affects markets. Investors expressed confidence and Wall Street rallied when the United States began bombing Baghdad during Desert Storm.
6. Keep an eye on business news as well. When it became clear that Microsoft Corp. wasn't likely to win its antitrust battle with the U.S. Justice Department, markets sank.
7. Bear in mind that markets often overreact to news of interest-rate changes, political changes and labor issues.
8. Choose stocks and other investments that you believe are long-term winners, regardless of today's headlines. Be prepared to take occasional short-term losses.

Tips & Warnings

• Avoid reacting to short-term market fluctuations.
• Keep a diversified portfolio so that fluctuations in the market don't have a drastic effect on your holdings.