The stock market dropped a little bit earlier in the week. Then, it went up a good bit. Then, it went down a good bit more. My word count says that’s twenty-six words– if you’ve read anything on this site before, you probably don’t need to keep reading. But if not…
What has happened this week does not matter. It doesn’t matter to you, to me, to the economy, or to 99% of investors. It matters for the day-trading types, who buy and sell stocks frequently and either gained or lost substantially this week. But becoming a successful day-trader is about as likely as becoming a pop star. The success of our global economy, despite the insinuations of many a headline, is not measured by the stock market’s short-term movement.
Here’s what’s actually happened: on Friday, February 9th, the S&P 500 was worth about what it was back in November 2017. The S&P is one, common way to measure how the stock market is performing. So if you have investments– through a 401(k), Roth IRA, anything– you have less money than you did a few weeks ago, but probably far more money than you did last year. The stock market only does two things that we can guarantee: rise and fall. Nobody knows when it will rise, nobody knows when it will fall. Many people will claim to, and about half of them will be right at any given moment. But the percentage of those who predict well for years is tiny (Warren Buffett is not the norm, and is not perfect, either). But hindsight is 20/20, as my mother always says.
The stock market has been making investors wealthy for about a decade. The S&P’s annual rate of return for the last ten years is about 9.5%. For five years, its 15.5%. That’s nothing short of ideal. In fact, the average return that we use for most hypotheticals on this site is 8%. So after a stellar run here, this writer (and many others) has been more than ready for a crash. The problem with expecting a downturn is, again, that it can’t be predicted well. If I were to have called it, I would have in November when Trump was elected, in January when he was sworn in, and every month after that when scandal after scandal, political and otherwise, rocked the U.S. and the world. No go. And for all I know, the stock market will steadily trend upward for another ten years. Or crash tomorrow.
So, reading these nonsensical articles from every source from Fox News to the New York Times is not helpful in any way. If the market was so logical, why were they not writing these articles the days before this relatively minor downturn? Alexandra Stevenson says that Wall Street is “jittery.” Can you imagine a group of caffeine- and coke-fueled idiots more jittery than those guys? It’s utter nonsense. There is no logic. Stocks fall when a critical mass of people sell stocks out of either fear of losing money or eagerness to lock in gains and buy back in at the “bottom” (another point that they can’t predict).
Here’s What You Do
For the love of God, nothing. Try to max out a tax-advantaged Roth IRA every year by investing $100/week or about $460/month. Regular investments mean that you buy on the way up and the way down (dollar-cost-averaging). You do as well as the market does on average. It’s enough to ask– you won’t outperform, you won’t underperform. If you’ve got no superfluous debt (credit cards, etc.) and enough money to live for six months if you lose your job tomorrow, then take 5% of your nest-egg wealth and indulge your urge to gamble, if you have one. Invest in Tesla, or buy during market downturns, or do whatever tickles your fancy. This isn’t necessary, but can keep the less-disciplined investors happier.
[If you don’t know how to invest, click here, and learn. In an hour. For free. Just read what we’ve written!]
Try to take solace in the fact that the market’s long-term (>5-10 years) trend is upward. You will lose money and, over the long-term, gain more than you lost. Times like these are when you’re effectively buying stocks at a discount. Now go enjoy your day and ignore all of this noise. If you want more noise, though, here’s a balanced article that emphasizes how most households have little to no stock holdings and that our economy is fairly strong.
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