3 reasons why you need to ignore recent market falls

In the past five business days, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has fallen four times and looks headed for another disappointing day today, with the market down 0.1% in early trading.

And already we are seeing some market commentators predicting the theme will continue for the rest of the 2016 year.

But here’s why you need to totally ignore the market’s movements over the past week.

A week does not a trend make

Just because the market falls for four of the first few days of the new year, that doesn’t mean much, and the market could soar higher from here or crash much lower in 12 months’ time. No one knows where the market will finish the year.

Big companies dominate

The Australian market is dominated by the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC), Telstra Corporation Ltd (ASX: TLS), BHP Billiton Limited (ASX: BHP), CSL Limited (ASX: CSL), Wesfarmers Ltd (ASX: WES), Woolworths Limited (ASX: WOW) and Macquarie Group Ltd (ASX: MQG).

Those 10 large caps represent just over half the market cap of the entire ASX 200 index, and factors that affect them will play a large part in where the index goes. In particular, the big four represent 30% of the index and are now our 4 largest companies, so whether the index falls or rises depends much upon the outlook for the banks and their earnings in the year ahead.

No individual company tracks the index performance

If you are investing in individual companies, you shouldn’t be all that concerned with what the index is doing. In 2015, the S&P/ASX 200 posted a fall of 1.9% according to Google Finance, while shareholders in Blackmores Limited (ASX: BKL) saw gains of 538%. Do you think they cared what the index was doing?

Be more concerned about the performance of your individual shares than the overall market.

Foolish takeaway

Concentrate on investing in high-quality companies that can grow earnings over time, invest regularly (including your dividend payments) and avoid the potential ticking bombs like Slater & Gordon Limited (ASX: SGH) and real bombs like Dick Smith Holdings Ltd (ASX: DSH).

Don't miss your chance to "invest like a Pro"...

Motley Fool Pro -- our most comprehensive and innovative ASX investment service -- will reopen for a brief time, to accept new members. That means you've got the chance to follow along as one top investor puts $1,000,000 of The Motley Fool's own money to work...all in ASX stocks. And you're invited to watch everything that goes into our decision -- 100% FREE! We've dubbed this innovative project, Motley Fool Pro. Click here to step inside for an exclusive look around - it's FREE!

Motley Fool writer/analyst Mike King owns shares in CSL, Telstra, Woolworths and Wesfarmers. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.