Is the Stock Market Reality?
Last week, my friend Karl (name changed to protect the innocent) dropped by for an impromptu visit. While we see each other nearly every other week in passing, both of us have been pretty busy lately, so it was nice to have a few minutes to catch up one on one.
We ended up talking about the wild fluctuations that have occurred in the stock market lately, and how the market had been especially weak in late summer. Karl remarked that earlier in the year he had a bad feeling about the market, and had moved all of his 401k account balance into money market funds. Considering that the major indexes were a good bit lower, he was feeling pretty good about the decision and I could certainly understand why. I was pretty thankful that I had become defensive in many client accounts too.
I asked Karl when he planned to move out of cash, and he said “Well, I’m not sure. When I look at the news, I don’t see much reason to risk my money in the stock market.” Well, I couldn’t blame him. When I had scanned the newspaper that morning, I read stories about a debt crisis in Europe, a high unemployment rate here in the US, and protests in New York city…just to hit a few highlights. Eek. Hardly news items that inspire one to risk money in stocks, right?
But here’s the “big thought” I shared with Karl, and that you might find useful not only now, but in the future. It’s a simple truism that is often overlooked: Most people assume that the market is a true and accurate measure of current reality. It’s not. It’s more like a mirror held up that reflects back how all of us, large and small investors combined, feel about the future. If people are feeling cheerful about what they read in the paper, see on Facebook, or discuss with their friends over coffee, they are going to be more likely to take risk and put money in stocks. More buyers translates to higher prices, all things being equal. Conversely, when people are feeling blue, they are more likely to hunker down, to vote with their feet and put their money in safer assets. The law of supply and demand is not subject to repeal.
If you feel bad about the economy and world events, you are probably not alone, and that sentiment is quite likely “reflected” in market prices. If you wait until the news looks better, you will probably pay more for a “risk asset”. On the other hand, if the headlines on your favorite website are talking about how AWESOME the market is, or if everyone at the barber shop, beauty parlor, or cocktail party is talking about how a particular stock or market sector is a “can’t miss proposition”, you should think carefully about putting your hard earned dollars at risk. If all the news about a particular stock or market sector is good, what new piece of information would cause it to move even higher?
I’ll never claim to have all of the answers…if I did I wouldn’t work for a living. But, I’ve learned a few things from my years in the trenches. So, as I often say to my good friends, “I’m just sayin….”
I hope this was useful not only to Karl, but others who are also reading. Stay tuned for more posts soon.
Yours Truly,
Joe Griffard, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
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