I read a very interesting industry article the other day that I wanted to share with you this month. It was about how the stock market’s recent crazy swings are often driven by emotion. It’s like a vicious circle: the market swings, people react (and maybe not as wisely as they should), the market reacts and swings, people react wildly….and so on. I love the analogy below:
Imagine your house has a ticker symbol, and it scrolls along the bottom of CNBC together with other ticker symbols. The price of your house, like a stock price, is set by a bunch of people you’ve never met making apparently random bets based on a combination of intuition, general economic statistics, output of computerized-trading program, and, a couple of times a year, the real price achieved by one of your neighbors actually selling a house.
Minute by minute, the price of your home would gyrate wildly. If you are a nervous type, you might lie awake at night wondering if its value would cover your mortgage in the morning.
Welcome to the world of asset price volatility. Luckily, the above scenario does not happen to your house, it just happens to your stocks.
Wow! That really hits home with me (pardon the pun) of how personally we could, and often do, react to stock market changes. And, if you’re heavily into one sector or another or especially one STOCK, imagine the stress of watching it bob and weave all over the stock charts!
And, it didn’t help the situation when the market fell over 1% on June 19th Ben Bernanke hinted that the Federal Reserve might start to scale back its $85B / month stimulus program! Thanks Ben; the Dow closed 206 points down that day! It was the worst day of the year for stocks. Over the next two days, there would be a drop of over 500 points; just under 4%. Amazing how much influence one man can have on the stock market.1
Now, take that one man’s comments and blast it world-wide through media outlets that are running 24/7 and often reacting within minutes. In August 2011, the stock market saw huge upward spikes and downward drops when the United States' credit rating was lowered a couple of points. Likewise, a large-cap industry giant saw its stock price plummet when one of its founders, CEO Steve Jobs, stepped down from his post because of medical reasons.
You could certainly argue that in both these cases, none of this would have made much difference without the overabundant media coverage, and probably would have gone unnoticed in a less media-driven world. The problem with the press is that it latches onto certain ideas and force-feeds them to the world with a barrage of around-the-clock coverage that recycles the same material repeatedly until something new comes along, because this attracts viewers, and more viewers equals greater revenue. For this reason alone, it's obvious why the press wants to rile up the population.
So, how do we stay above this fray or at least avoid some of the craziness? Stay informed but don’t obsess. Partner with an advisor that you trust and who has your best interest at heart. Diversify your investments to include some products that are principle-protected. And most importantly, contact us with any questions or concerns you might have. ~Larry
1Source: CNBC.com
“My Peace I leave with you; my peace I give you. I do not give to you as the world gives. Do not let your hearts be troubled and do not be afraid.” ~John 14:27
