There is nothing more terrifying to a new investor than to see the stock market jump wildly in the course of a single day. In minutes, a $100,000 portfolio may gain or lose $10,000 or more. Before you swear off the Stock Exchange for good, here are some things to think about:
1) Ask yourself if the value of your businesses really changed by ten per cent or more in the course of a few hours. Unless the company announced a buyout or a bankruptcy, the solution is almost certainly no. Short-term economy moves are often based on rampant fears, excessive speculation, and unfounded rumors. In times of great economic instability, traders look to experts to tell them what to believe, and effects are magnified when everybody jumps on the bandwagon.
2) Look at your company, not the marketplace. Does it pay a great dividend? Is it possible to weather a recession well? If you enjoyed it and nothing has changed, hold firm. On the other hand, if you can not see anything to justify a price jump, sell while the selling is good.
3) Remember that the market isn’t a zero-sum game. Traders sometimes become caught up in the notion that if stocks are up by a certain percentage, they will inevitably fall by the same percentage when things get rocky. While that can happen, good stocks are generally worth more as time continues, both due to inflation and because the companies grow. There’ll be pullbacks and sudden jumps, but the chart of a fantastic company will trend up over the long haul, and so will the chart of the market-long periods of stagnation notwithstanding.
4) Realize that the sector is significantly less difficult to predict in the long term than the short one. Individuals who tell you they understand what the market will do tomorrow or next week are usually lying. But it’s a fairly good bet that a very depressed market will go back to normal in a few months and a super-inflated one will come back to earth. The same will go for individual stocks. The principle is known as reversion to the mean.
5) Be aware that sometimes there is nowhere to go but up, and vice versa. Throughout the 2009 stock crash, people started asking an absurd question. Could the stock exchange go to zero? When you hear that question being asked, take all of your money and grab stocks with both hands. Can they actually think people would stop buying groceries or utilizing gasoline? A single stock may go to zero, but not the market as a whole. That is why some diversification is vital.
During the preceding tech bubble, people talked about how earnings did not matter. Here’s a helpful hint: When Allen Greenspan or someone like him begins talking about irrational exuberance, it is time to consider selling.
6) If stock market volatility makes you sick to your stomach, ask yourself why you are still on the market. Some people can take market changes in stride. For others, the thought of a reduction is so frightening they lose sleep, develop ulcers, and become deeply depressed. And when they have a profit, they get so excited that they jump the gun and miss most of it. If you end up on an emotional roller coaster that matches the market’s gyrations, consider lowering your exposure or getting out altogether.
While the patient and the bold can make a whole lot of money in the market, it isn’t worth it if your peace of mind is ruined and your wellbeing trashed. The purpose of trying to earn money, after all, is to make your life better.
The world probably won’t end as you’re gone. Don’t read the stock quotes, don’t assess the market-just take a rest. Most studies show that people who only check their portfolios two or three times per year do better than those who snore.
Conclusion: Learning to handle stock exchange changes with equanimity can improve your financial picture considerably. Extremes of all sorts tend to fade out in time, so avoid rash moves at any cost.