The beginning of the summer holiday is a good time to defuse one of the predominant fears of stock market investing, market risk. While it pays to stay aware of market risk, you should never let it become an obsession. All investors need to recognize that stock prices do sometimes reach a market peak or ‘top’, then go into a slump. However, some investors and advisors make a career out of analyzing past market tops, especially those that were followed by deep declines. These ‘top-stalkers’ always seem to think the next such decline is just around the corner. Here are three common top-stalker categories. Permabears. Many of these investors failed to buy when stocks hit a low in 2009, or earlier great buying opportunities, such as in 2002, 1998, 1992 — or even 1987. They bitterly resent this lost opportunity, and they let it colour their outlook on the future. To permabears, stock prices always seem ‘too high’. They let their wish for a second chance-to-buy-cheap turn into a prediction of a market crash that may come decades in the future, if ever. [ofie_ad]
The investment counterpart of Elvis sightings
Commercial alarmists. Pessimism and dire predictions are the stock-in-trade of some newsletter publishers. They cater to investors who share their views. Some have regularly predicted financial calamity for 30 years or more. Some tie their grim predictions in with predictions of terrorism and social breakdown, the spread of new viruses, or projections of doom based on the financial troubles of Europe, belt-tightening by China’s government or the latest pronouncements of the U.S. Federal Reserve Board. Their forecasts are the investment counterpart of Elvis sightings. Lucky-lines/magic-numbers specialists. These investors and advisors practice an extreme, near-mystical form of technical analysis (market analysis that focuses on stock-price changes and trading data rather than company fundamentals). Instead of an aid to profitable investing, they are looking for what you might call ‘a sign from heaven’ that we are near the end of the ‘7 good years’ and are about to enter the ‘7 bad years’. Our investment advice: Be a cautious optimist. Don’t let top-stalkers or other market pessimists keep you out of the market. Instead, control risk by holding a balanced portfolio. You’re far better off seeking to manage risk by following our three-part strategy: Invest mainly in well-established, dividend-paying companies; spread your money across most, if not all, of the five main economic sectors (Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities); and avoid stocks in the broker/media limelight. If you buy gradually during the course of your investing career, in both good and bad years for the stock market, market declines will have little effect on your long-term profits. COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members Do you base your investments on assumptions of how the stock market will do, or are you more inclined to hold stocks through the ups and downs of the market? Let us know what you think.
