As I write this, the market has mounted a comeback over the past two weeks. This is undoubtedly good news for everyone. But I assure you that this is not going to be a steady rise back up the charts. The market will go back down again. Maybe we have seen the very bottom, but no one can be sure of that until we are further out and can look back. This will be a roller coaster year for investments. The stock market is very efficient at taking information, or the perception of new information, and almost instantly reflecting it in the price of stocks. There is so much happening in the country right now and so much information immediately accessible, that any major announcement can and will directly impact the market. In fact, the assumption of a major announcement can be priced into the market days before the news is even released. The glut of information and very excitable people will create a roller coaster for the rest of this year. I’m not making 2010 predictions, but I do think this year will see many ups and downs. I also expect the market to finish the year better then it finished 2008. I know this doesn’t seem like much to hope for, but remember; this financial crisis was not created overnight and cannot be fixed overnight.
Many people are scared right now. Investments have gone down and some investors have headed for the hills. The worst time to make decisions, especially financial ones, is when you’re acting out of fear. Fear clouds judgment and causes otherwise smart people to do dumb things. Greed and fear are the two most prevalent emotions when it comes to money, with fear being the worst. This is because the human brain perceives a small loss with much greater intensity then it does a small gain of equal size. For instance, most people report that fear of losing 10% of their money evokes a stronger response than the thought of making 10% on their money. Both outcomes involve 10%, but the fear of losing bothers us much more and sticks with us much longer. Therefore, when a market such as this comes along, fear drives many people to behave in uncharacteristic ways.
I say this, to first try to calm you. Take a deep breath and don’t become a victim of fear. Unless you need to use every penny of your money all at once in the next couple of years, you will be alright. We know that there is risk and investments can go down. This is why we plan and diversify. Our goal is to minimize any losses while putting you in the best possible place to gain from the recovery. Investing in the market will be a fact of life for your entire life. To keep pace with inflation, cost of living, health care, taxes, and all the while trying to make some money, no other place can offer these benefits like the market can. As you get older your exposure should be reduced, but very few people in the world today will be able to avoid the market entirely. So if you think of this in terms of needing to be in the market for life…your time horizon just got longer. Another consideration centers on the market and your retirement. You will not need all of your retirement money on the very first day you retire. Your retirement money needs to provide you with an income after your full time working life is done. This time frame can stretch to thirty years or longer. The increasing cost of living can impact your nest egg significantly over that many years. Even a modest gain from your investments will allow you to stave off the affects of inflation and allow your money to last longer and continue working for you. So even if the recovery takes a little longer, you have longer to let the bulk of your money continue to grow.
Those of you who have stayed in the market and continue to contribute will be rewarded. You are buying in at lows that haven’t been seen since 1997 and you will be in a better position for it. The people that make the most money are those that get in on the ground floor. Well my friends this is the ground floor that has not been around for 12 years. Now is the time to get in. This window in time allows us to plan for the ideal market approach of buy low and sell high. With that in mind, I hope you are all well and spring time has arrived. Hang in there.
