When I first started investing, I combed the internet for some reassurance that the daily ups and downs of the stock market made no fucking sense. I’m happy to report after 3 years of searching, that article still eludes me. Every financial adviser is essentially a used car salesman, who will tell you they know what is going to happen next in the stock market. Truth is that NOONE knows, so it’s best to accept as soon as possible. If someone tells you they are sure X stock is going to increase by Y date, you can safely call that person a liar, and move on with your life. The good part is you don't really have to pay attention to any of that to be successful with your investing strategy.
You won’t ever hear me say that I’m an expert on the stock market. In fact, my beginnings as an investor have been documented in my Dividend Income articles. I have admittedly made a few mistakes, diving into marijuana stocks like a moron, or just simply buying/selling stocks I knew nothing about. Fortunately, my mistakes have been infrequent and by putting them out in the open on this site, hopefully you can avoid doing similar things! Nobody’s perfect, and we’re all striving to get better. My hope for this website is to create an open forum where we can discuss our strategies, opinions, and goals. That being said, it also wouldn’t be any freaking fun if we can’t look back and shake our heads at all the dumb things we’ve done with our money in the past. Today, I am much better suited to assess what risk a stock comes with, although we never know what a stock price will do when we buy it.
Let's talk a little more about the market itself. The market goes up and down every day. There will be up days where you'll be happy to see your account with positive returns. You'll tell people you made SO much money in the stock market today (I do it all the time because it makes me feel like Bill Gates). Then there will be down days and you'll keep your "losses" to yourself (that's how people are, right?). The fact of the matter is these aren't actual gains or losses. They are temporary changes in value. The only way we can calculate gains or losses is when we buy, sell, or receive a dividend of cold hard cash. Our strategy is to BUILD a portfolio, so we will rarely sell off our stocks.
The most annoying part of the stock market is when analysts or money managers pretend they know why the stocks go up and down. “Price Targets” are my favorite. They’ll read something like “analysts have set a price target (expected max price) for Coca-Cola at $47”, while it only trades at $41 today. Um, okay, so everyone should just buy Coke stock because these “analysts” must be right! Wrong. They don’t really even mean anything. If anything, I simply interpret this as “Coca-Cola could go up to $47”, which I already knew on my own. Like I said, if you didn’t know any better, you’d almost believe them. You'll hear things like "Investors fear X" and "Y causes a rough market day", because apparently their jobs are to try to explain the unexplainable. I always find myself wondering, if investors were so scared of the Chinese market, why the hell did the stocks go UP the very next day? Did they forget about China, or do they just not care anymore? Anyway, you get the idea. For every [insane] person that predicts the end of the world, there are 100 assholes that are predicting the next stock market crash. Fortunately, we don't pay much attention to TEMPORARY value going up or down within the stock prices. The movement, of course, is based on the amount and relationship of buy/sell transactions. When a stock increases in price, more people are buying than selling, and vice versa. It’s a simple concept, but we never can predict when movements will happen. Again, brokers who want to manage your money out of the kindness of their hearts (+a “small” 2% fee) will tell you they can time the market and know what’s going to happen next, but none of them actually have any idea.
Here are a couple of principles I try to live by with regards to the stock market. You’d be surprised at how easy it will be to pick stocks when we get more in depth about our strategy of picking safe and steady dividend stocks. For now, I’d keep these thoughts in mind:
If you are going to look at your portfolio every day, don’t stress about the ups and downs. People always tell me not to check my investments every day, but I enjoy checking them, therefore I do so constantly like a crazy person. What we can’t do, is let the ups and downs affect our mood or decision making. You have to realize some days will be bad, but others will be good, and there have always been more good days than bad over the long haul.
The stock market always goes up over X years. I know this is a vague statement, but historically we’ve seen about 7% returns every year since the early 1900’s. That means that people have always made money in the long run, and we have no reason to believe it will change .
We know recessions will happen. Recessions are ALWAYS a certainty. The market crashes, people panic and sell off their stocks at a discount just to “salvage” something. This is the complete opposite of what you SHOULD be doing. By realizing that recessions are a certainty that we need to plan for, we won’t be shocked or stressed when they occur.
Your money is losing value in a savings account. The only way to keep up with and beat inflation (value of the dollar decreasing) is to put your money in the stock market. Let it work for you. Keep an emergency amount of cash in your savings account and feel confident putting the rest in the market. If you don’t need the money that you invest within a few years, you can sleep well at night despite the ups and downs in the market.
Never sell when the market is down unless something changes with your stock. Sometimes you will have to bail on a stock if the outlook suddenly turns grim, but 95% of the time it's just the ups and downs of the market pulling all stocks down with it. Never sell when people panic. Never open any of the “expect stocks to drop 75% soon” type of articles. It’s all bullshit. You only lose money when you sell a stock position. If you don’t sell, you are only losing temporary value.
Always buy when people panic. You are essentially buying great stocks at a sale because people have either overextended themselves by investing money they need, or they don’t know what they are doing. Usually it’s the latter. Buying stocks in a recession is like shopping on Black Friday, except everyone is cowering in the corner instead of going for the Playstation 4s. Coke (KO) has increased its dividend every year for 52 straight years, am I really going to let it drop 20% in price and not buy it on sale? Nope. When the stock drops 20% and I look at my fridge at work and see it stocked with Coke and Diet Coke, I will feel great about my investment.
Don’t pay attention to articles on Google Finance. They are really awful. I find everything that Google does to be amazing, which is why I can’t believe they aggregate such awful stock articles on their finance page. Half the articles have some sort of pop up subscription that you have to fill out to even read them. Buy/Sell recommendations, price targets increasing/decreasing, “we are all doomed” type of shit - right on my favorite search engine! The same people should be forced to print “I was wrong, the world didn’t end yesterday” articles for wasting all of our time with scare tactics. We'll be better off steering clear of all this nonsense.
We are going to inevitably discuss the stock market in a personal finance discussion, so I felt this was a good starting point. I’ll always tell you why I chose a stock and how I made the decision, but I don’t work on wall street and I don’t have any desire to do anything more than buy/hold in my portfolio. There are tons and tons of good companies out there to own stock in, and they will all contribute to our ultimate goal of dividend income. The most important part is generating the savings to invest through discipline and good habits, which we will definitely discuss at length in this forum!
Hopefully this alleviates some concern about the market. The stock market is a confusing place, but we don't need to know it all to find valuable companies that always make money. As you read more of these posts, I hope you start to envision your investing plan and become more comfortable with the idea of putting your money into the market to achieve your goals!