Near-Sighted Investing
It is not a crime to be nervous about the market because nobody likes to see his or her portfolio shrink. And goodness knows there are plenty of reasons to be concerned when we hear about things like bogus accounting, crooked CEOs, and events worldwide that have an impact on the market's performance.
Yet it's wrong to ever allow short-term market developments drive long-term investment decisions, and that is exactly what many investors do!
Whenever you find yourself becoming too myopic about your investments, try to sober your thinking by remembering these few key points:
1. The three main engines that drive stock prices over time are inflation, interest rates, and corporate profits. While it is certainly true that many things can affect stock prices in the short term, what affects investment returns over the long term however are, and I repeat, inflation, interest rates, and corporate profits.
2. Successful investors invest on a regular basis, regardless of short-term market movements. Now it isn't easy to be putting new money into the market on a consistent basis - especially in a period of time when stocks are declining - but how well your portfolio does five years from now will depend to a large extent on what you do in the near-term. And if history holds true then I'd be willing to bet that anyone who invests today will be glad they did five years from now!
3. Market corrections within bull markets are supposed to scare investors . That is the purpose of corrections - to jolt investors and restore value to the market. As we discussed previously, ever since March of 2000, we have been in a secular bear market. And ever since February of 2003, we have been experiencing a cyclical bull within the secular bear. This type of market condition has a history of lasting anywhere from eight to eighteen years in length. And the only time that you can make money is to remain alert and try to profit during periods of cyclical bull market action.
One way to get an idea of where the market is heading is to look at a chart of the market's Intermediate Potential Risk. This chart looks at the percentage of stocks on the New York Stock Exchange that are trading above their 200-day moving average. To understand what this chart is telling you, whenever 70% or more of the stocks on the NYSE are trading above their 200-day moving average, the market is considered to be in "higher risk" territory; below 40%, the market is in "lower risk" territory. When it is between 40% and 70%, the market is considered to be in "neutral" risk territory.
The Intermediate Potential Risk chart is the single best indicator for assessing stock market risk on a 3 to 6 month basis.
* * * * *
Yet it's wrong to ever allow short-term market developments drive long-term investment decisions, and that is exactly what many investors do!
Whenever you find yourself becoming too myopic about your investments, try to sober your thinking by remembering these few key points:
1. The three main engines that drive stock prices over time are inflation, interest rates, and corporate profits. While it is certainly true that many things can affect stock prices in the short term, what affects investment returns over the long term however are, and I repeat, inflation, interest rates, and corporate profits.
2. Successful investors invest on a regular basis, regardless of short-term market movements. Now it isn't easy to be putting new money into the market on a consistent basis - especially in a period of time when stocks are declining - but how well your portfolio does five years from now will depend to a large extent on what you do in the near-term. And if history holds true then I'd be willing to bet that anyone who invests today will be glad they did five years from now!
3. Market corrections within bull markets are supposed to scare investors . That is the purpose of corrections - to jolt investors and restore value to the market. As we discussed previously, ever since March of 2000, we have been in a secular bear market. And ever since February of 2003, we have been experiencing a cyclical bull within the secular bear. This type of market condition has a history of lasting anywhere from eight to eighteen years in length. And the only time that you can make money is to remain alert and try to profit during periods of cyclical bull market action.
One way to get an idea of where the market is heading is to look at a chart of the market's Intermediate Potential Risk. This chart looks at the percentage of stocks on the New York Stock Exchange that are trading above their 200-day moving average. To understand what this chart is telling you, whenever 70% or more of the stocks on the NYSE are trading above their 200-day moving average, the market is considered to be in "higher risk" territory; below 40%, the market is in "lower risk" territory. When it is between 40% and 70%, the market is considered to be in "neutral" risk territory.
The Intermediate Potential Risk chart is the single best indicator for assessing stock market risk on a 3 to 6 month basis.
* * * * *
posted by Bob Moser at
5:56 PM
0 Comments:
Post a Comment
<< Home