I am sure that most people would be shocked to hear that the stock market is off to its best start in 13 years. Through the first seven trading days of the year the Dow Jones Industrial Average is up nearly three percent, the S&P 500 is up 3.6 percent, and the NASDAQ is up a whopping 5.3 percent year to date. I suspect most people would be surprised to hear this. They would probably wonder how the stock market can do so well with all the issues we are facing such as the government shut-down, ongoing trade issues with China and continuing issues with Brexit. The answer is quite simple and that is that markets have a mind of their own and sometimes when it comes to markets good news is bad news and bad news is good news.
I have said this for years, it is impossible to predict short-term gyrations in the market. Markets are irrational over the short run and sometimes they don’t make any sense. That is why I constantly try to educate investors about making long-term financial decisions based upon short-term movements in the market, whether up or down.
It is important that when you get involved with investments you decide whether you’re an investor or a trader. An investor, who most of us should be, is one that takes the long-term approach to the market. A successful investor builds diversified and balanced portfolios to survive any type of market. A smart investor is one who understands volatility in the market and is one who does not let short-term gyrations dictate their investments. On the other hand, traders are not looking long term with their investments but are looking for short-term movements that they can capitalize on. Traditionally, traders are willing to take greater risks for substantial rewards. Of course, traders that take substantial risks also have to accept the fact that their losses can also be substantial. The way I look at it, traders are equivalent to gamblers in the fact that their focus is short-term. Typically, when a trader buys an investment he may only be in that investment for a few days or for a few weeks. On the other hand, when an investor buys an investment they are not looking a few weeks down the road but rather, years and years down the road.
Someone who is a trader is much more active in the market and constantly has to be watching their investments not weekly, monthly or quarterly, but hourly. After all, traders are looking for those short-term opportunities that they can capitalize on. The reality of the situation is that most of us are not going to watch our investments all the time, and that is why when amateurs try to be traders, the great majority of the time they lose.
As far as I’m concerned, most of us should be investors that take a long-term view of the market. It is important to recognize that the market is not a get-rich-fast scheme. It takes discipline and patience to be successful. Particularly, when markets are volatile either moving up or down, it is important that an investor realizes they don’t have to react to every up and down in the market. Investors with patience and the discipline to take a longer term approach are generally the ones who are going to be more successful.
Does the fact that we are having a good January mean that the rest of the year will be solid; of course not. We have no idea what events will occur that could have a positive or negative effect on markets. That being said, as I’ve always told investors, if you’re looking one year down the road the stock market is not for you. Markets are too volatile and too unpredictable if your goal is one year down the road. However, if you’re looking long term, short-term gyrations in the market are going to be nothing more than a speed bump and not something you have to react to.
I’ve always been a believer that it is impossible to time the market. It would be nice if we could get in the market at its low point and then sell out when it reaches its high. Unfortunately, you and I can’t do that, and no one has been able to do that successfully. However, what makes investors successful is when they have a game plan that is based upon their individual situation and that their focus is on that game plan, as opposed to what’s happening in the market on a day-to-day or a week-to-week basis.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org.