Monday, May 10, 2010

Investing: Turbulence in the market

Bad News

The last two weeks have been really bad in the stock market. Bad news always spook investors and we were full of bad news. It's these surprises that shock the market including the Oil crisis in the Gulf of Mexico that could wreck the ecosystem, environment, economy, and the way of life in that part of America... and of course the credit crisis in Europe that could derail the Euro and even the EU.

Equipped with the Economist and just having read Only 3 Questions, I feel like was a quick shock to the system, and I was pretty confident the markets would be fine in a week or two. Even as I type, reports of the "surge" is happening in the financial world. After nearly gaining 80% our portfolio this year, we had about a 20% decline in a matter of 2-3 days. In the past, that meant panic selling of stocks to retain as much cash as possible before more blood is spilt. Make the bleeding stop.

Stay on TARGET

But this time around, along with the confidence of my older sister, we waited on the sidelines and even bought as the market had major a correction, even a one day drop of almost 1000 points in the Dow Industrials. I also went in the day after that drop happened not knowing whether it was going further down or not.

Is this crazy? Like I said before, most of our investments are locked into 401k and Roth IRAs. This means we won't be able to touch it in 20-30 years, which means we have a long time horizon. Even if stocks dropped 20-30 percent, we still have time for it to recover. Whick I hope sooner rather than later.

There are too many crazies out there

But in any case, as I scope the panic selling, I notice that many of the solid companies were just being sold because everyone else is selling. The crazy overreaction towards the market was irrational. Just like the crazy bubbles during the Dot Com and Real Estate were irrational. So you got two very irrational feelings moving the market in two very different directions. The only RATIONAL thing to do is to stay calm when you are MAKING a lot of money really fast... and stay calm when you are LOSING a lot of money really fast. The market will correct itself sooner or later.

When rational, sane minds come back, the market will resume it's course. But along this ride will be irrational EXUBERANCE of 1990s and mid 2000s and you will also have irrational FEAR as in 2000-2001 and 2008-2009. Both cases will inevitably return to a more rational market because irration is not sustainable.

Invest in your Sanity

So here's to investing. Buying and owning companies that produce jobs, create innovation, grow America, and develop the world. That's the right thing to do.

What can a budget and an investing plan do for you?

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