MF 328 : More on investing and what's going on with the market
Updated: Mar 20
Today, I continue looking at investing in an uncertain market. More at www.bemovingforward.com.
[NOTE: I do not give investment advice. Investing involves risk and you should always do your research or speak with an investment professional beforehand.]
From lows, more lows, to highs and ... ?
Last Thursday the market went into a tailspin as worries about rising interest rates and an anticipated “hot economy” caused investors to migrate out of high growth tech stocks and into more traditional stocks such as cyclicals and traditional sectors like retail and travel.
It was a bad day and at first, I felt that spot of egg on my face, having recorded 327 on investing basics the day before only to release it during one of the worst market crashes in over a year.
Then, I thought about it a little more and realized that last Thursday was the perfect day for that episode. If you’re a new investor or thinking about increasing your participation in the stock market, a reset or correction is a great time to find opportunities.
As I explained on last week’s write-up, the only change I would have made in hindsight is to flip the statement I made: “today may be a good day in the market and tomorrow may be a bad one.” Last Thursday was more like “a very bad day, followed by another one” on Friday and a seemingly amazing recovery on Tuesday.
Today, it looks like the market is headed towards another strong run and if you “bought the dip” over the past week or so, you’re already seeing some sizeable gains.
The point though is that no matter how the market is doing, in my opinion, it’s always a good day to plan your long-term investment moves and find those opportunities to invest. On days like last Thursday, you will find those “black Friday” sales on stocks that you may have had your eye on but were too high or “too hot” to buy previously. Remember, stocks rise and fall on more than just how the company is doing. That’s the weird conundrum that takes some getting used to. A company may be doing well, have a great quarter reporting strong sales and a strong vision for the future only to see the stock drop 20, 30 or more points on a bad day when the market crashes.
This is where your bargain shopper radar should be on full alert. As I covered last week, if you apply the save-and-build over time strategy, you can use the funds that you’ve been putting aside into your brokerage or IRA account to purchase good stocks at a discounted cost basis. Incidentally, if you already own that stock and paid a premium for it previously, you now have an opportunity to buy more and lower your average cost basis. Or, if you take a more gradual approach, you can continue purchasing fractional shares at $5, $10 or whatever small increments you have to continuing building your portfolio. As you do this consistently on both good and bad days, you are averaging your cost basis such that you take the sting out of the low days and avoid the “FOMO feels” of up days.
Incidentally, days like last Thursday are why I don’t invest with margin (borrowed money), or trade options (contracts to buy shares), while days like today are why I don't do short trades (borrowing shares to bet against a stock). Yes, there are investors do very well with those types of activities and they can lead to impressive gains in the short-term but they also carry a lot more risk and exposure to losses. I’m a firm believer that you only invest what you can afford to put into the market (and lose). I also take a long-term view with investing. I’m not great at predicting what the market will do on a given day, much less an individual stock so I avoid riskier, more speculative activities. If you do decide to venture into options, shorts, or margin trades, take extra caution and do your homework so you know what you’re getting into, including the risks. Get some experience with the basics, including gains and losses on trades, and don’t make decisions based on emotion, panic reactions, or FOMO. Adopt a beginner-learner mentality. In other words, don’t try to fly a plane when you’re learning to drive a car.
As for what the future holds, we are still in uncertain times. While inflation rate worries have tempered this week, it’s hard to predict whether we’re in a continued bull market or experiencing a temporary revival within a bubble. This is why as an investor, it’s critical to do your homework on where you invest your money and stay abreast of events within the larger world around us. Everything from labor and unemployment stats to vaccine rates to international relations and even migration patterns will all impact where the market goes and in which direction. Wherever the market goes today, tomorrow, next week and over the next few months and years, I’m a believer that investing with discipline, research, and a plan can be a healthy way to help reach your long-term financial goals.
Finally, as we approach tax season, it’s important to know that investing involves additional tax responsibilities. If you gained on a recent "hot stock" that you sold, you may have a capital gains bill to go with that.
While we live in uncertain times, we now have access to more information than ever to stay up to date along with ways to sharpen your investing skills through simulations like paper trades (or even simple spreadsheets), build your acumen, and develop a thick skin to weather the ups and downs. Use these tools or work with an investment professional to make informed decisions that will benefit you and your future.
Check out MF 327
Some recommended reads on investing
The Cold Hard Truth on Men, Women, and Money by Kevin O'Leary (****)
Beating the Street by Peter Lynch (****)
Learn to Earn by Peter Lynch (****)
One Up On Wall Street by Peter Lynch (****)
Jim Cramer's Get Rich Carefully by Jim Cramer (*****)
The Intelligent Investor by Benjamin Graham (***1/2)
The Little Book That Still Beats the Market by Joel Greenblatt (*****)
The Little Book of Market Wizards by Jack D. Schwager (****)
Khan Academy courses (free)
Check out my conversation with Alissa Carpenter on financial literacy
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