Stock Market Advice From Chicken Little
One day, while Chicken Little was walking in the woods, an acorn fell and hit him on his head. "Goodness gracious me!" said Chicken Little, "The sky is falling, the sky is falling. I must go warn everyone." We see this all the time. The stock market goes straight up for eight or nine months, and if there are 2 or 3 down days in a row, there is hand-wringing and the moaning all over the place. Who are these people that panic at the first sign of a downturn or with the slightest bit of profit taking? The first group are people who get in the near the top and are now worried that their small losses will turn into big losses.
Also, people who haven't invested in the stock market are in this same box. For many, many years they were wrong to not have invested, but now that the market has declined very slightly for a few days they would like the point out how smart they are and how dumb everyone else is. Short–sellers are the next group. Short selling is selling a security that the seller does not own but is committed to repurchasing eventually. It is used to take advantage of an expected decline in the security's price.
The press comes next. You have heard this before: "bad news sells newspapers." The 24–hour television news stations must make every tiny move in a stock or in the stock market seem like a momentous occasion. Imagine hearing such a stupid statement as "this is the largest stock market decline since last week." The slimiest are the politicians whose party is out of power. They try to make themselves look good by making the other guys look bad. It does not matter which group you belong to or who is in power or out of power at the moment. An out of power politician must find the cloud in every silver lining. So, how can you protect yourself? What should you do to keep out of "the sky is falling" trap? The most important thing that you can do is to be clear about your long-term financial goals and objectives. Yes, in the very short run, many circumstances can affect the value of your portfolio.
In a well-diversified portfolio, these declines will be relatively small and short lived. Twenty years from now, it will not have mattered who was shot during the past twenty years or who was in power or who went to jail or to war. Simply ask yourself, "how will three dollar a gallon gasoline affect my retirement twenty years from now?" Don't worry about tales of imminent doom and gloom. Don't listen to, and certainly, don't act upon rumors and scare stories. And, most of all, don't spread these stories yourself.
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