Editor’s Note: Today, Alex discusses the recent market volatility and two things you must understand about the stock market: 1) it is unpredictable, and 2) there are ways to protect yourself.
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Matthew Carr, Chief Trends Strategist of The Oxford Club, is hosting an exciting new webinar to help you get started: the Marijuana Millionaire’s Event. Matthew predicts that the potential legalization of marijuana in the U.S. is poised to help millions get rich, if they know how (and when) to get on board.
Tune in to the Marijuana Millionaire’s Event tomorrow at 1:00 p.m. – this free, LIVE webinar will explain how you can get in on the ground floor!
– Christina Grieves, Senior Managing Editor
It’s often been said that there are no stupid questions. I tend to agree with this, generally.
There are thousands of areas of specialization in our complex society. Mastering even one of them can be a full-time occupation… or preoccupation.
We should never feel embarrassed or ashamed to reach out and ask questions – informed or not – to remedy our ignorance.
Yet, as an investment analyst, the question I’m asked most frequently – “What do you think this market’s gonna do?” – really has no good answer.
Stocks move on many factors, including economic growth, monetary policy, fiscal stimulus, interest rate moves, consumer price index changes, currency fluctuations, energy prices, legislative proposals, executive actions, corporate earnings, geopolitical developments and election results, to name just a few.
Many of the biggest sell-offs of the last three decades were reactions to events that absolutely no one predicted.
No one forecast that Saddam Hussein would invade Kuwait and grab its oil fields. That – and the buildup to the Gulf War – set off the bear market of 1990.
No one called in advance for the collapse of Long-Term Capital, a hedge fund overseen by Nobel laureates that lost $4.6 billion in four months in 1998.
(Fed Chairman Alan Greenspan had to recruit 14 major financial institutions to help supervise its orderly liquidation and avoid a financial panic.)
No one predicted that a handful of zealots would fly planes full of people into buildings on 9/11. (That caused the stock market to close for a week and then plummet when it opened.)
And while various pundits and hedge fund managers claim to have predicted the 2008 financial crisis, there’s a big difference between recognizing the bubble in home prices and subprime mortgages – obvious to rational observers everywhere – and envisioning the subsequent financial collapse.
No one knows when this bull market will end. Or when the next one will start. That’s not possible. People who claim to know are either fooling you or fooling themselves. Or both.
Analysts can’t even agree how old this bull market is, something that seems fairly objective.
The predominant view is that the last bear market ended after the Dow, the Nasdaq and the S&P 500 all bottomed on March 9, 2009.
Yet a bear market is defined as a drop of 20% or more.
Last December, the Nasdaq, the Russell 2000 and the Wilshire 5000 were all down more than 20% from their highs. The S&P 500 – the leading U.S. market benchmark – fell 19.8%.
So unless you’re a stickler who is unwilling to round up to 20%, this bull market isn’t 11.1 years old. It’s 5 months old. And still in diapers.
This is all meaningless, of course, as most chatter about “the market” generally is. There is no way to accurately and consistently forecast the market’s short-term moves.
There is no set of factors that correlate with market upturns and downturns. And there is no investment system that will eliminate this uncertainty, although it’s not from lack of trying.
Count yourself a sophisticated investor the day you wake up and ask, “Since no one can tell me with any certainty what the economy or financial markets will do, how shall I run my money?”
This question – not “What do you think the market will do?” – is the beginning of investment wisdom.
And the answer, boring to those who want something more exotic and expensive, is a) asset allocate properly, b) diversify broadly, c) analyze businesses (not market cycles), d) lower your investment costs and e) tax-manage your portfolio.
I’ll have plenty more to say on each of these topics in the weeks ahead.
In the meantime, when folks ask what you think the market will do, feel free to tell them the unvarnished truth. No one knows.