The Psychology Of The Stock Market

17 04 2009

A year and a half ago the Stock Market was approaching 15,000 points on the Dow Jones Index.  Recently, it dropped below 7,000 points.  More recently, it climbed back up to about 8,000 points. 

The talking heads on CNBC and the representatives of the Stock Market are touting this “turn around” as one of the greatest events in the history of “the Market.” 

What is that old saying about statistics???  The Stock Market is and has been a terrible place to be for more than a decade.  The spokespeople for “the Market” tell you it is a “long-term investment” place.  Unfortunately, they never identify what long-term is. 

The other night I was listening to syndicated radio money man Clark Howard talk about what a 30 something should be doing with his investment money.  Clark was all over the tremendous opportunity the Stock Market held out for this person.  His assumption was there was no doubt it would go back up to previous levels and exceed them.  He probably would have given him the same advice ten years ago.  Where would that have our then 20 something in a decade of consistent investing?  Down 30-40% in his “long term” investment. 

I can only think of the person flipping pennies.  They flip 10 heads in a row and are convinced a tail is more likely on the next flip than a head.  Of course, the odds remain 50/50. 

I fall into the camp that believes the Stock Market will not see its previous levels for many years to come – if ever.  I personally believe it is just as likely that we will see 5,000 as 10,000 on the market.  I believe a fundamental change has happened.  If we do see those levels again, it will – in my opinion – simply be the result of a grossly deflated currency. 

A couple of years ago, I had the audacity to question the Stock Market at its lofty levels.  I was viewed as a weirdo by the established investment community.  I preached a message of cross asset class diversification.  Those that followed my advice are doing very much better today than those who did not. 

I believe (for the individual investor) that the Stock Market is no different than going to Las Vegas.  The likely outcome is very similar. 

Get TRULY diversified.  If I can help, let me know.

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