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Hang On! Stock Market Continues To Plummet! Investors Running Scared!

17 September 2008 No Comment

Stocks continue to plunge as more and more fear spreads about the U.S. financial system and the overall economy. Ugly is getting uglier. The Dow is now around the 10,600 mark. The questions remain: How are you reacting to these events? Are you fed up and pulling your money out (and taking huge losses while you do it)? What should you do?

First, Addressing Fellow 20-Somethings…

I know your 401(k) is down big this year. I know your first attempts at stock trading have been a disaster. The worst thing you can do is to give up and pull your money out. How much money have you really lost? A few hundred bucks, maybe as much as a couple thousand. This is such a small amount of money over the course of your investing future that you will never regret sticking with this investing thing. In fact, you’ll be thankful that you learned a lesson about risk and stocks with such a small amount of money invested.

Let’s look at an example. Joe Blow has 10k invested in stocks. He’s had a disaster of a year and is down 30%. Each year he is putting 5k into his brokerage account to save for his future. He continues to invest in strong positions especially when they are down. Ten years from now, his gains outweigh the 30% of the 10k ($3,000) that he lost in the beginning. The morale of the story: keep adding money to your account and keep buying long term positions.

Remember, I told you the Dow was headed towards 10,000 back in June. I also said to stay away from Financials and that the experts calling bottoms every week were retarded. Our focus here is to keep buying strong long term positions.

Human Nature

I have a question for my readers: What is the first investing concept most people learn as they start to learn how to invest. The answer is: Buy Low, Sell High. Next question. How many people follow this tried and true principle? Answer: Hardly anyone. Why is this? Because human nature encourages the opposite.

Right now, most average investors are selling off their positions and pulling their money out of their accounts. Why? Because they’re extremely frustrated and want out. They are taking their losses and will put their money in something safe, like a 3.5% CD. Their money will sit in the CD until the next bull market. When the Dow hits a new high, THEN they will invest their money. Do you see the problem? This scenario can be explained as simple as buying high and selling low, the opposite of what you should be doing.

The Next Right Step

I know what you’re thinking… you’re thinking I’m nuts because I’m insinuating that you should buy stocks right now. Well, not necessarily. I’m telling you not to throw in the towel. Keep and eye out for good stocks that are simply following the overall market trend lower. Remember, over short term time horizons, most stocks follow the overall market trend.

Want an example of a stock that is way down and is hardly affected by the financial system meltdown? Philip Morris International (PM) was down almost 9% today. Do you think people in Asia are going to stop smoking cigarettes because of the real estate/financial crisis in America? Maybe. But it’s sure a better bet than trying to call a bottom in financials.

For the record, I’m not buying financials. I know they are low, but I have no idea how to analyze these companies.

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