The Stock Markets Are Crazy — It Might Be Your Fault
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Anyone who has tried following the stock markets for even a relatively short period of time will have discovered two things:
- There is always a new, unexpected force wreaking havoc with stock or bond prices; and
- After a while, it all begins to look eerily familiar.
After your third reading of "Markets Surge on Fed News" alternating with, "Markets Plunge as Investors Grow Bearish" in as many months, you may well wonder if your news feed is on autoplay. This perpetual stream of news flashes makes a lot more sense to the audience for which it is intended—namely, the short-term investors.
I am not just referring to day-traders hunkered over a computer in a suburban basement somewhere (though, they are certainly in this group). I also mean all of those investors who have become enamored with the stock market as a game, albeit one with particularly high stakes. The short-term investor has alerts and tickers set up on her phone or computer so that she can see just how much theoretical money she has won (or, ahem, lost) since the last time this particular stock danced across her screen. The strategy behind short-term investing is to guess just the right moment to buy and just the right moment to sell. And the effort to do this requires that you exaggerate any event (or Federal Reserve press release) that could possibly swing prices in another direction. After all, you are trying to get a handle on things just before they go from minor possibilities to clear effects. The only problem with this strategy is that every other short-term investor is out there doing the exact. same. thing. So, yes, you folks are actually creating those wild swings that you are trying to anticipate.
Don't get me wrong, this can be an enormously fun game. I have some clients who put aside what we call "play money" to take part. It can be a lot of fun to watch your fortunes rise and fall with everyone political shift in Europe and every market revelation in China. And as long as you admit what you are doing and you've got a bit of money with which to gamble, there is no reason you shouldn't be able to join in the game.
But if you are going to need that money eventually for buying a home, feeding yourself retirement, caring for your children or staring a business (you know, that sort of stuff), then skip the stock tickers. It's bad for your blood pressure anyway.
Go to any stock market chart and switch the view from 3 month trends to 5 or 10 years. All of a sudden you will see the other trend line the one that subsumes all of those crazy dips and valleys. Neither I nor anyone else can promise what the markets as a whole will do over the next ten years. But we do know that, whatever it is, it will happen regardless of the latest wording from the Fed.
For more on investing for the long-term, check my series of posts on Asset Allocation 101 or, better yet, send me an email.