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JOHN RANSOM: You’ll never believe what the stock market does next
A generation of stock market professionals, brokers, traders, writers, and gurus, who never went through the 1200-point slide that happened to the Dow Jones Industrials on Monday, are confidently reporting what will happen next. And while the slide made for great headlines, and another opportunity to blame Trump or Obama or Wall Street for whatever it is that’s ailing you, it also reinforced some truisms about playing and being played by the stock market.
There is an old saying that individuals don’t make money in the market– they just borrow it from institutions for a while. As the hype surrounding the stock market grew over the months, it’s likely that the losses from Monday’s bloodletting most affected individuals who had been sitting on the sidelines and recently converted cash to stocks as the hype grew.
The stock market is a bad game to play in the short-term, especially for individuals nearing retirement. In reality, an investment in the stock market should represent an investment in the economy for at least the next ten years.
Short-term worries about inflation or interest rates or GDP growth or contraction rates for the current quarter really shouldn’t alter a well-thought-out investment program that is designed to last a lifetime, not just a few months.
That’s hard to keep in mind in a blow-by-blow media and political atmosphere that treats each day as a sprint rather than a marathon and breathlessly “reports” what will happen next. These stories are both written and distributed by people who, more often than not, have very little experience in what they are writing about.
For example, Fortune featured an article on Tuesday titled What Investors Can Expect After the Biggest One-Day Selloff in History. The magazine– ostensibly about wealth, which means it really should know better– wrote of the Monday losses as a “crash” and prophesized that “The stock market appears to have hit a turning point of sorts, though, with investors growing more uncertain of its continued gains, and seeking to feel out the top.”
Not to pick on someone in particular, but it’s instructive that the Fortune writer, Lucinda Shen, graduated from UNC Chapel Hill in 2015 in English Literature and Communications with a minor in philosophy. She likely was attending high school the last time the market actually crashed. None of that means anything particularly bad about her reporting, per se.
The article is generally a boiler-plate that you’d commonly see after a large swing in the stock market. It includes quotes from the usual sell-side bias brokerages that want the stock market to continue upward forever and a revisit to the VIX, commonly called the “fear index,” which spiked, as it should with fear rising.
The wrap-up is a fair summary of the article: “Goldman Sachs on Monday,” writes Shen, “commented that the market could swing either way, suggesting that investors should consider hedging their bets with options.”
Yep. In an article touted to tell investors what to expect next, the conclusion was that the market could either go up or down.
In fact, on Tuesday, the market went both up and down, losing points, then rallying to close.
With expert commentary like Shen’s though, it’s easy to see why investors are confused and more likely to lose money than make money when they do it themselves in the stock market.
And it’s one reason why investors tend to bail out too soon in times of uncertainty and hang on to cash until the last bear is convinced of the unstoppable bull market.
While Shen rightly pointed out that investors ready to retire today are more vulnerable to short-term swings in the market than those who still have a decade or more before retirement, she didn’t tell investors what they can do to mitigate the risk.
And there is plenty they can do, including laddering their investments to meet their cash-flow needs.
A person with a well-thought-out investment plan doesn’t need to have a minor in philosophy to know the market might go up or down.
They just need a plan to account for either eventuality. And then let the market do what it does next.
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