New College students take stock market crash course
There seem to be a lot of negative headlines regarding the economy right now: “Factory Slowdown Raises Concern,” “Cool-Down in Profit and Revenue Growth Looms,” “Seeking Safety, Investors Buy Up Gold,” “U.S. Manufacturing Slowed in February.”
These are just some of the headlines investors face when they open their daily newspaper or visit their favorite online sites.
We have had an extraordinary run in the stock market since March 2009. When will it end? How will it end? I have no idea when and how it will end. Neither does anyone else.
There has been a spike in the number of market commentaries. Each commentator has a different view. It can be very confusing.
May I suggest a little common sense may be the best plan of action.
I think we can agree that few — if any — investors saw the meltdown coming in late 2008 and early 2009. Some of the headlines before the crash emphasized the stock market was in a “goldilocks” period. It wasn’t.
Many of the commentaries after the crash were doom and gloom for the future. They again were wrong. We can’t look to these pundits for clear guidance.
In addition, investors need to be aware of the “talking of one’s book” commentators. The easiest example of this is the analyst who never sees or says a negative thing about his or her industry.
Optimism breeds overconfidence just like fear breeds panic. It makes sense that when everyone is optimistic and overconfident, perhaps the wise investor should not be. Perhaps that is the time to remove a little from the equity side.
Conversely, when everyone is fearful, that may be the time to step up and buy. “Blood on the Street” is the time to buy, as an old Wall Street adage goes.
The best path is to always stay the course. Don’t sell in a panic — ever. Choose investments that will go up in a good market.
Yes, they will go down in a market correction, but here’s the big thing ... if you buy the right investments when the market correction ends, you should expect your investments to begin rising again.
It’s that simple yet a lot of investors don’t follow this path.
The dot com bubble when it burst left a lot of high flyers down for good. Many of them did not recover. That is why the average investor is typically better off with low-cost equity index funds vs individual stocks alone.
If you invest in the S&P 500 Index fund or the NASDAQ index fund, you should expect these (and others) to eventually recover. You won’t be left behind. If the major indexes don’ t recover, we will have a lot more things to worry about than the stock market.
The S&P 500 dropped over 55 percent in value during the great recession. It took almost five years to recover. But recover it did and then steamrolled to even higher values. For those who stayed in the market, that is.
Remember that investing is a long-term pursuit. You will have your ups and downs, but staying the course should be profitable.
There are no silver bullets in investing. A good portfolio should be positioned to weather all outcomes. Yes, the S&P did drop as previously mentioned, but the wise investor saw the optimism in the markets and reduced his or her equity position accordingly and did not suffer the steep drop the S&P 500 experienced and it took much less than five years for their portfolio to recover.
Investors typically operate in an environment of uncertainty. We tend to underestimate the range of outcomes that may occur. We should not plan for one outcome but plan for many of them.
As always, stay invested through the ups and downs. Take the pundits with a grain of salt. In some cases, a lot of salt.
Remember, they are usually wrong.