Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on helping you develop a successful approach to investing in the stock market. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away. Today’s tip: “If you’re always looking for the next market decline, you’re bound to miss out on many good investment opportunities.” As we have seen over the past decade, stock prices do sometimes reach a market peak or “top,” then go into a deep slump that lasts a year or two—sometimes even longer. However, some investors and advisors make a career out of analyzing past market tops and the declines that followed. These “top-stalkers” always seem to be sure that the next such decline is just around the corner. Here are three common categories of “top-stalkers”:
- 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 an imminent, once-in-a-generation market crash that may come decades in the future, if ever.
[ofie_ad]
- 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, and lately, endless projections of doom based on the financial troubles of Europe. 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 a concrete aid to profitable investing, they are looking for what you might call “a sign from heaven” that we about to enter the “7 bad years.” Even when their analysis falls short, they are not discouraged, but come back with a fresh batch of magic numbers.
Our advice: Be a cautious optimist. Don’t let top-stalkers or other market pessimists keep you from investing in the stock market. 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/public-relations 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 If you had one piece of advice to give to fellow investors who were anxious about pessimistic headlines and dire predictions for the market and the economy, what would it be? Let us know what you think in the comments section below. Click here.
