Fear Driving the Stock Market
We’ve seen a lot of loss in the U.S. stock market this week with the Dow going down below 9000 for the first time in 5 years. Our bad economy is having a global effect hitting the Asian markets, the European market, and all others too, I’m sure. Despite the crisis with financial institutions and it’s effect on housing and mortgages, The Wall Street Journal and others in the know agree… it is lack of confidence that is driving this poor economy. Yes, we had problems, and we put a safety device in place but it caused a lack of confidence in people and now fear is causing more problems than we started with. t’s like when someone screams fire in a crowded building and everyone panics. They all run for the exits and people get trampled and hurt, even when it’s a false alarm.
We’re being told that we should not panic even after this “black week” of seeing the Dow go down below 9000 for the first time in 5 years. It’s hard not to panic, yet we really have no other choice but to be calm. When you’re in panic mode, someone telling you “don’t panic” just doesn’t always seem to sink in. If you think of this as the same advice they give in any emergency situation, then it makes sense. Fear and panic puts you (and everyone else around you) in harm’s way.
Recessions Can Make Millionaires!
It’s recessions (or crashes) like these that can make millionaires out of investors. If you keep a steady head and refuse to panic you can make money but you have to think long term. Warren Buffet makes his money solely from the stock market and is he letting fear dictate him in this market? No way! Warren just surpassed Bill Gates as being the richest man in the world by making over $8 billion in this past month (earnings from the end of August to October 1.) As Warren has said many times before, all we have to do is think smart and use this and every recession as an opportunity to buy low and sell high just as we are supposed to do. He puts his money where his mouth is and he buys low (but of course low to Warren Buffett can be considered very high to the rest of us! lol) and when he does sell, he sells high. Warren invests for the long term and he doesn’t panic and pull all of his money out of the stock market while it’s down… and neither should we.
Are You Buying HIGH and Selling LOW in the Stock Market?
We all know the first rule to the stock market is to “Buy low, sell high” but historically that’s not what the average individual investor does. Most of us don’t usually make much money in the stock market because we do the EXACT opposite. Individual investors tend to only buy when times are good and they hear how well the stock market is doing in the news. As a result, they make a few bucks here, and a few bucks there but the minute the market goes down, most individual investors actually SELL their stock and get out… so not only do they not make any money in the stock market, they lose money. Then they go back and do the same thing again when times are good and the market goes up. (and it ALWAYS goes up!)
Many people stop putting money into their 401K plans, IRAs, and mutual funds when they hear things are bad in the market. When you do this, you miss out on a great opportunity to be buying stock at a low price which is the whole point of investing. If you keep putting your money into your fund regularly, you’re buying shares in the fund at a low price and that is GOOD! (You’re buying low and you’ll sell high later on!) The worst thing someone can do is to close their 401 or retirement plan just because the market has crashed. Not only do you lock in your losses, you also have to pay the capital gains taxes on those losses, and a 10% penalty on top of that! Wow, talk about a loss…
Don’t act out of fear!
So don’t act out of fear! Keep a level head and know your options. If all of this talk about the stock market really bothers you, then just don’t look at your statements for a while. I know it sounds crazy, but that’s what the experts advise and hey, we really don’t have many other options, do we? If you’re already in the stock market you have to ride it out, and look for opportunities to buy some good stock if you have the money right now because there are deals to be had (and there will be more!). The only other alternative is to take a loss. It’s your money and your choice, but don’t let fear rule your actions.
