This past year has been a terrific year for the stock market. The S&P 500 is currently up almost 23% this year alone. And yet even in the midst of a seemingly good market, there are still plenty of naysayers who will tell you how we are dangling on the precipice of another collapse.
Be careful about the news you consume
First, I want to say I am not anti-news. I think it is our duty as citizens to be well informed of what is going on in our world about us.
That said I think we have to be very careful of the news we consume. Consider this. It’s 10:00 pm. It’s been a long day and you are tired. A promo for the 11:00 news comes on.
- The weatherman says looking like it’ll be a gorgeous day tomorrow. Sunshine and blue skies. Get all the details at 11:00.
- Or alternatively, the weatherman says there is a major winter storm moving into the area tonight. Possible blizzard-like conditions. Tune in at 11:00 for details on how your commute will be impacted tomorrow morning.
Which forecast are you going to stay up to watch?
Just be aware that bad news sells.
How the news affects our investing
So what this means from an investing standpoint is when the market drops 400 points, it’s front page news. But 2 days later when it’s back up 300 points, the story is buried somewhere on page 12. If you aren’t careful you can become convinced that the world is coming to an end pretty easily. Don’t think this is so?
A few months back I read an article on Bankrate.com entitled 10 shocking wealth facts. Three items in particular from this article really struck me:
- “Including dividends, Standard & Poor’s 500 index gained 135 percent from March 2009 through January 2013, during what people remember as the ‘Great Recession.’ It gained the exact same amount from 1996 to 2000, during what people remember as the ‘greatest bull market in history.’
- According to Bloomberg, ‘Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis.’
- Franklin Templeton asked 1,000 investors whether the S&P 500 went up or down in 2009 and 2010. Sixty-six percent thought it went down in 2009, while 49 percent said it declined in 2010. In reality, the index gained 26.5 percent in 2009 and 15.1 percent in 2010.”
Still think the news we hear doesn’t have an impact on our perceptions?
Don’t let fear influence your investment decisions
It is understandable that many people are concerned about putting their long-term savings in the stock market given what we have seen in the past 15 years with the collapse of the tech bubble in the early 2000’s followed by the serious losses that were seen in the Great Recession. In spite of those losses the stock market has hit all-time highs several times in the past year.
Fear however has led many people to lose out on those gains. Sure the stock market is very similar to a roller coaster. There are ups and there are downs. But remember the only people that get hurt on a roller coaster are those who jump off.
2008 was a scary year if you had money invested in the stock market, as it lost more than half its value. However, the only people that actually lost real money were those that got scared and sold when the market was down. Those that gulped and stayed the course have seen all that money they “lost” come back and more.
So what should you do with long-term investments?
So what is going to happen next week? next month? next year? Are we currently seeing a bubble and that is about to come crashing down around our ears as some “experts” say? Or are we going to continue to see an upward trend with more all-time highs as other “experts” say? I don’t have a clue. (And to be honest they don’t either.)
What I do know is that over the last 100 years we have seen world wars, cold wars, epic natural disasters, terrorist attacks, presidential assassinations, economic upheaval, depressions and recessions, and many other disastrous situations. Many of these have caused the markets to tumble in the short-term but in the long-term they have always bounced back to new heights.
The only people harmed in these circumstances are those that got scared and sold at the low point. Which brings me back to my original point. I think we need to be careful with what we fill our mind in this age of 24 hour cable new services along with a host of internet sites that are designed to cater to the entire scope of political views.
If you aren’t careful this barrage of news can often lead to fear, distrust and doubt. That can lead you to sell out of fear at the worst possible time, or it can lead you to never invest in the first place. You keep your money in low risk accounts thinking you are safe when in reality taxes and inflation are stealing all your earnings.
The bottom line is the stock market does go up and down over time, but history has proven through good times and bad that the ups almost always out gain the downs. If you need your money in the short-term, investing in the stock market is a very bad idea but if you are saving for long-term goals that are 5 or more years in the future, you will have a very hard time beating the returns you will get by investing in the stock market.