Within the space of two trading days, the S&P 500 Index declined 6.13%! I jokingly tell folks who have seen my news segments on WYFF4 that when they see me on TV, that probably means that something bad is happening. Rarely does the reporter call when things are going well—how boring would that be!
During my interview this week, one of the sound bites that they played over and over went something like this: “I am amazed at the number of people that are surprised when the stock market goes down. The stock market always goes down—but it always goes back up”!
There are several key ingredients to making money in the stock market. The first key is to not put any money in stocks that you may need to use in the next 1 – 5 years (depending on the specific need). Secondly, expect prices (not necessarily values, more on this later) to go down from time to time. If you expect prices to go down, you should be less likely to sell at the lower prices. It’s only a loss if you sell. Lastly, don’t ever say after a down market day “I just lost “X” amount of money yesterday”! Unless you just bought the investment the day before, you didn’t lose any principle, you just temporarily (if history continues to repeat) lost some of your gain.
Your “principle” is not the highest price an investment rose to. The only way that the price before the drop would be your principle is if you sold at that price. If someone paid $100,000 for a piece of real estate and sold it later for $200,000, they would more-than-likely tell you that they made a profit of $100,000—even if they could have sold it a year earlier for $230,000. Of course, they lost the opportunity of making a larger profit, but they didn’t “lose” anything. I don’t give many guarantees, but I can guarantee you that you won’t lose money taking a profit. The goal is not buy at the lowest price and sell at the highest price. The goal is to simply buy lower and sell higher than you bought.
Dr. David Kelly, Chief Global Strategist with J.P. Morgan Asset Management, used what I think is a good illustration to describe the volatility in the stock market. He said that reacting to market fluctuations is like forecasting the weather versus understanding the climate. You can’t predict movements in the market day to day, but over 5 or 10 years, you understand the trends. One of my colleagues Joel Robinson and I are both from Ohio. We were discussing the weather analogy and likened it to living in Ohio and trying to decide if we wanted to move to South Carolina. On any given winter day, it could be 45 degrees in Ohio, but only 30 degrees—or lower--in Greenville. If we made our decision based on that single date point, we would never move to South Carolina, assuming we wanted a milder winter. However, by studying the difference in climate between the two states, South Carolina would win every time (Ohio would take the prize if we were doing the same comparison in July!).
None of us actually enjoy the current turmoil in the stock market, but that’s not what is important. The important part to pay attention to is what happens AFTER the market turmoil! The volatility of stock prices has been described as a “V” (meaning prices go down but quickly recover), or a “U” (prices take a longer period of time to recover), or a “W” (you get the idea). However, they have never been illustrated with an “L” (prices go down and never go back up). So I’m not surprised, or even concerned, when the stock market drops in price—it’s what happens next that matters the most.
Stock “prices” fluctuate virtually every minute of the trading day. The underlying companies’ “values” typically don’t change much on a day to day basis. Invest for the value, not the current price “noise”!