Michael on January 22nd, 2008
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You: Dude, that is so not what the websites I visit are saying. Have you even used the Internet today?

Of course I did.

You: Then what, exactly, are you smoking?

Just good clean (albeit cold and occasionally by dirty-diaper-flavored) oxygen. I’m fine.

Gary: You shouldn’t write your posts so far in advance.

Wrong, Gary! I’m writing this right now!

Of course the Dow Jones is down from yesterdays close, by about 1%. But when you read the web today, watch the national news tonight, or look at the good old fashioned newspaper in the morning, the articles, and especially the headlines focus on what happened at its worst today, and that was a 465 point decline.

Yet if you bought an equal amount of every stock in the Dow Jones Industrial Average this morning and sold it at the end of the day, you’d have made a tidy profit.

You: What?

The Dow opened down about 400 points, yet closed down about 100 points so, roughly speaking, it gained 300 points from open to close.

You: I didn’t realize.

Since that’s not sensational, it doesn’t make the headlines.

You: I guess I should have read the whole article, huh?

Perhaps. Another alternative is to ignore them completely. After all, if today’s stock market activity proved anything, it is that volatility is in all parts of the market and that it is still impossible to predict which way things will go.

You: So what does it mean to me?

It’s actually a good thing for most people, particularly to those that are still working.
You: How can that be?

If you’re still working, you ought to be saving. (If you’re not, here are some tips to get started now.) And if you’re saving, you ought to be investing. When you see stock prices come down (as they have been doing consistently for the last few weeks), it means that your most recent (and likely, next several) investment purchases (i.e, through your 401(k) plan and IRA) are going to be made at a time when stock prices are relatively cheap.

That’s good, because it means you will get more shares for the same dollar value. Long term investors love stock market dips.

You: They do? If I look at my current account balance it keeps going down. I hate minus signs, the color red, and the parenthesis around the change of value.

I hear you. That’s why the long-term investors tend to love the stock market dips the longer they have been investing and only passionately so when looking back. It is the shares purhased during these dips that typically show the largest gains later on.

You: So the net-net is?

Enjoy the sell-off.

Gary: I can’t believe this. I’m getting killed over here. I got tons of calls coming in and you’re telling people to enjoy it?

I’m telling everyday investors to enjoy it. I know you’re not enjoying it!

Also, never try to time the market. Even if you woke up this morning knowing it was likely to be a bad day (as many people felt it would be), had you sold first thing in the morning you would have lost far more than had you stayed in to today’s close.

You: What does tomorrow hold?

I don’t have a freaking clue. But long-term, smile. It’s the only way to live Beyond Paycheck to Paycheck.

What do you think about what is going on?

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2 Comments to “The stock market is way up!”

  1. Lisa says:

    Good to know that we’re not in trouble for the time being. The news at the end of the day was certainly better than at the beginning.

    I wonder, however, that if we do head into a recession, what that will mean to investors. Granted, I imagine not all recessions are created equal. I’m not even sure I’d know a recession if it kicked me in the shins, but it’s still a scary word to my meek ears.

  2. Michael says:

    Thanks for your comment, Lisa. While it’s impossible to predict the precise consequences of a recession, as a general rule it’s usually not a good short term phenomenon for investors. But the bigger potential implication of a recession is a job loss. Such a spontaneous loss of income is a key reason to make sure you a) have an emergency funs set aside and b) that it is invested in a high interest-earning account you can tap into quickly. Still, the overwhelming majority of people will not suffer a great negative financial consequence as a result of a recession.

    FYI, a recession is often defined “as two consecutive quarters of decline in real GDP.” So, no, you wouldn’t recognize it while crossing the street. Only when someone tells you. Here’s hoping that if any of you ever hear it, that the information comes from a newspaper and not your HR department.

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