Normally I don’t care too much about what the stock market or economy is doing. Because my stock picking technique is very much on autopilot now I only really care about what the companies that I have shares in are doing and couldn’t care less about the rest of the market.
So when I see news reports crying doom and gloom more often than not I go back to playing Angry Birds and forget all about it.
Today however a bunch of headlines caught my eye. “US Stocks Wipe Out 2011 Gains”. “Stocks Hit 11 Month Low”. “US Stocks Plunge.” Sounds scary doesn’t it.
Unfortunately headlines like these do make things worse as panic buyers rush to jump out and scream that the stock market sucks.
Fear moves the market much faster than optimism does.
I’m not denying that the US economy is in trouble. It clearly is. But let’s put things into perspective a bit.
If we look back at the history of the stock market you’ll see that most stock market gains and losses have been largely unpredicted. Two dates in particular are interesting to look more closely at.
October 19, 1987: the Down Jones Industrial Average had its biggest fall in one day, down 1738.74 points (22.61%) – The 1987 Crash
October 13, 2008: the Dow Jones Industrial Average had its biggest gain in one day, up 936.42 points (11 percent).
The day before both of these events, the news was relatively normal (no reports of doom and gloom before the ‘87 crash, or predictions that the stock market would reach new highs prior to the large gains in Oct 2008).
In fact, in case you are curious here were the major headlines in the news for the previous days:
October 16, 1987 (the 16th was a Friday, since the crash on the 19th happened on the following Monday) – “175kph winds cause blackout in London, much of southern England”. What? Even though the Dow fell 100 points on this particular day there were no predictions of a crash? Hmm. #fail
October 10, 2008: (again the 10th was the Friday, because the 13th was a Monday). “Orakzai bombing kills 110 and injures 200 more”. Well a bombing is pretty significant but no good news about how much money you could make if you invested today? What a shame. #fail
So no-one, not even professional stock market analysts could predict either the crashes or highs before it happened.
Which means that news can only report of what HAS happened, not what will be. (That can either be comforting or freak you out depending on your perspective).
Ok. So it’s clear that no-one has a crystal ball and knows what is going to happen tomorrow with the stock market. But if it’s so unpredictable then why should you invest at all?
Yeah, I keep going back to the history because really it’s the only thing we’ve got to go on. The only evidence that has proven time and time again to be predictable (over the long term) is the cyclical nature of the share market.
But before I go into this further here is a reminder of the Dow Jones Industrial Average (including today’s fall) over the last 80 or so years.
Can you even see today’s drop? Er, hang on let me get my glasses, um, nope.
So in the grand scheme of things, this little fall really isn’t a biggie.
But I still understand your fear of investing right now. Because it’s completely normal. So normal in fact that it’s been documented time and time again as a curve showing the mass human psychology in the stock market
Right now we’d be in about the depression part of the curve. You know, the one with the arrow pointing to “Point of maximum financial opportunity”. Just before Hope, then Relief and then Optimism.
Except those that are too scared won’t see that, they’ll just see the news reports which I’ve already shown you can’t predict what the market is going to do next. Ahh good old human nature. Bummer huh.
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