Recently, Amanda posted about using flexible CDs to access money quickly. She decided to go this route as opposed to investing in the stock market because:
I believe the stock market is going to dip again. I am not an expert by any means, but I do watch the news and quite frankly, the world economy is not looking so hot. We are not insulated from Europe’s recession and even China’s economy is beginning to slow down.
I have not jumped in yet because Warren Buffett says you should buy low and sell high. I feel that if we were to purchase stocks right now we would be buying high versus if we wait it out for the potential lower stock prices to purchase.
I want to look at both of these in depth because I think many others have the same fears as Amanda. I want to make it clear that I am not out to tell Amanda or others why they are wrong, I am simply trying to educate people about the stock market because there is a lot of misinformation out there. Let’s get started.
The Stock Market Is Going To Dip Again
The stock market will drop again. Hopefully, it won’t be as bad as it was in 2008. But it will drop. That is how it works. The stock market runs on a cycle, just like the economy. It has times of growth (a bull market) and times of contraction (a bear market). But you never know when this will happen.
Part of this is because the stock market is a leading indicator. Without going full-blown economics on you, economists look at leading and lagging indicators to tell when the economy is in a recession and when it is growing. Anything that tells you that the economy is going into a recession before it happens is a leading indicator. Anything that tells you after the fact is a lagging indicator.
Since the stock market is a leading indicator, one would think then that they could time the market. Unfortunately, it doesn’t work like this. Most times, we don’t put two and two together until after the fact. In other words, once we are in a recession, we see that the stock market was telling us we were heading in that direction.
So what is the point of this? The economy isn’t great, here in the United States or in other countries around the world. But that is not a reason to not invest. As I mentioned above, the market will drop. It always does. And it will rise too. It always does. You just never know when it will rise or fall. The good news is that the market rises more than it falls. If it didn’t, then it would have fallen to zero a long time ago. Therefore, the best time to invest is now.
Buy Low and Sell High
This is great advice and advice I particularly follow. But here is my question: are stock prices high today? Based on 5 years ago, the answer is yes. But what about 5 years from now? Chances are that stocks prices today will be considered low when compared to the future. After all, as I just mentioned, the market rises more than it falls.
The idea of buy low and sell high is simply one based on making money – you want to sell for more than you bought for. If you aren’t planning to sell for many years in the future, then you should most certainly buy now. On the other hand, if you plan on selling in the next year or two, then you should stay out of the stock market. It’s for long-term investing, not short-term trading.
Investing in the stock market can be a dicey thing for many people. But you have to keep things in perspective. The market will fall. It always has and it always will. But it will always rise too. The stock market has never dropped to zero and I doubt it ever will. (In the rare event this would happen, the monetary system will collapse so physically money will be worthless regardless.)
I will end with a different quote from Warren Buffett in 2008, one that I personally enjoy:
“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”