Watch out for the bears on Wall Street. Be on guard against the unpredictable bulls as well. Bu...
Watch out for the bears on Wall Street. Be on guard against the unpredictable bulls as well.
But most of all, beware rampaging metaphors and other figures of speech. Whenever emotions run as high in the stock market as they have during the drop of the last few days, attempts to describe the action run to wretched excess.
Hence, headlines such as 'The Collapse of the 10,000-Point Floor' in the New York Times. Funny last week, but five minutes into the next trading session the Dow Jones Industrial Average was back above 10,000 again.
Across town, the New York Post saw things on a biblical scale, 'Haemorrhaging Continues as Markets Seek Saviour'.
My stalwart local paper, the Connecticut Post, did much better at keeping some distance on the subject. 'Market Catches Mad Dow Disease', it reported. But then it too succumbed to epochal visions, adding 'Bullish Era Comes to Close as Bears Rule Wall Street'.
I'm hardly one to throw stones here. In 30 years of writing about investing and the markets, I've overdone the imagery a thousand times myself.
However, hype isn't harmless. People can only read about so many floor collapses, era endings and Second Comings before one of two things happen. Either they start to panic themselves, or (gulp) they begin to question the credibility of the press.
Let's leave that latter line of inquiry to the journalism journals, and focus instead on a constructive lesson investors can take from the current convulsions: how much we don't know.
Forget figuring out when a falling market will hit bottom. You don't know, I don't know, and neither does anybody else. One of my clearest memories from covering the Crash of 1987 was a trader's simple comment: "If only these support levels really were support levels."
There is also no telling when the next sustained advance in stock prices will begin. What we perceive as the psychology of investors sometimes called the mood of the market stubbornly resists all efforts to figure it out. In 1999, investors fell over themselves to buy stocks of internet companies that had never earned a penny. Now, those same investors care about nothing but "earnings disappointments".
A few people make a good living trading stocks in this maelstrom. I take my hat off to them. The rest of us have no business playing that game and, fortunately, no need to do it either.
The attribute that sets the stock market apart from so many other areas of risk casinos, commodity markets, pools on the 'March madness' starting today in college basketball is that it usually pays out more than it brings in. In the parlance of economics, it's a positive-sum game.
In a basically healthy economy like the one in the US, the money invested in stocks becomes capital that creates wealth jobs that pay wages and salaries, earnings, dividends and so on. This is a chaotic process, full of mishaps, misdeeds and mistakes. But on balance it has worked amazingly well.
For this reason, I confidently assert, average Joes and Janes are still smart to invest in stocks, provided they do so with a diversified, buy-and-hold, long-term approach. No return is guaranteed, not even the return of your capital.
If we must know what we will get for our money, there are alternatives such as Treasury bills and certificates of deposit. They're good for, oh, 4% or 5%, guaranteed.
Precisely because of the uncertainty in the stock market, equities offer the hope of better payoffs maybe much better. Over the past 21 years, on average, it was more than three times as much (16% a year, as measured by the Standard & Poor's 500 Index).
To give myself a chance at those rewards, I put some of my money in stocks, stock mutual funds or both.
To protect myself against the chance that the 1980s and 1990s bull market really is over, and much tougher times lie ahead, I keep some of my money out of stocks.
The proportions depend not on some market forecast, but on my best appraisal of my own ambitions and temperament.
Then my chance at success comes down to patience, not clairvoyance. Sure, I'll keep following the markets regularly they're endlessly fascinating. But I will only distract myself if I try too hard to figure out things, like the future, than I cannot hope to know.
Chet Currier via the Bloomberg New York newsroom
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