Daily stock obsession unhealthy
These next few articles are based on a letter I sent my clients in mid-October. The market back then was a bit bouncy. (Since I write these articles well in advance of publication, I don’t know exactly what they are doing today.) The increased market volatility seems to concern a lot of folks, and since you are folks, you might have some trepidation about what is going on.
Nothing I am going to say here is all that new. I’ve said it before over the years in other columns. But for some of you, this is the first time you’ve invested in the market when it has dropped like this. Others have fresh concerns with Ebola, Syria, ISIS, the Economy, and the National Debt—not to mention those idiots from the (insert your least favorite political party).
With all of this going on, I’m not too concerned and I’m definitely not worried. I know something that most people find difficult to believe: Those scary ups and downs in the markets are a good friend of the long-term investor. Why? Because it scares people away from stocks. Long-term, the effect is that stocks have provided returns far higher than bonds or cash.
Yet, if you listen to the hype, you know that most people think that stocks are risky and some think they are downright scary and only for fools. It’s the occasional dizzying gyrations like the ones we had recently that cause people to jump out of the market. This can create buying opportunities. I like buying opportunities.
That is why I suggest not obsessing over daily market movements. Why allow yourself to fall for the trap of getting anxious over short-term swings in stock prices? If the goal of your investment is years away, then short-term movements make no difference. If your goal is short-term, then yes, short-term movements are important—and you should not have that money in stocks in the first place.
When I say that I’m not worried about what is going on in the markets, that doesn’t mean that the markets won’t go lower in the coming days, weeks or months. In fact, corrections of at least 10% are delivered with some regularity on the market’s way to new highs, and the occasional 20% drop is certainly not unheard of.
The thing to remember is that the daily price of your stock holdings is determined by mood swings of skittish investors whose fears are stoked by the endless babbling of experts and commentators on TV, radio and print (well, not me, but those other people). It’s hard to blame them since long ago they learned that the best way to get and hold your attention is to scare the heck out of you.
So what does determine the true value of your stock holdings? Sorry, I’m out of space, come back next week and I’ll tell you.
This article was published under the title "Seesaw market investor's friend" in the Wichita Falls Times Record News on November 9, 2014.