Understand The Stock Market

    Published: 06-16-2009
    Views: 119,794
    Financial advisor Ric Edelman discusses how the stock market works.

    Ric Edelman: If you are like a lot of people, your impression of the stock market is shaped by major events and there was none bigger than the crash of 1929 which kicked off the great depression. Stock prices plumb at nearly 50% in just 17 days, bankrupting many Americans. And there was black Monday, October 19th, 1987. Back then stocks failed 23% in a single day and of course there is our recent credit crises but the truth is while these events get a lot of attention, they really don't represent how the stock market typically functions.

    I am going to reveal for you the two major myths that cause lots of people to stay away from the stock market. First, many people believe that stock prices rise and fall and many believe that the stock market is risky volatile and unpredictable. Neither of those statements though is true. Oh, sure in any given day stock prices do rise and fall but over long periods stock prices rise a lot for a long period, they fall only a little for a short time. This is why it's wrong to assume that the stock market is risky and volatile and unpredictable, sure stock prices change every day, but when you invest money, do you plan to sell just one day later or even thirty days later? Of course, not. So, who cares about daily or monthly price changes?

    If you are planning to invest for years or even decades, say for college or retirement, it makes no difference what the market does today. Instead you should look at the market's performance over longer periods. When you do that, you will find that the stock market isn't nearly so unpredictable, or nearly so volatile as you thought. In the 80-10 year periods since 1926, the SMP 500 stock index made money 95% of the time and in every 15 year period and longer, the stock market has made money 100% of the time. So don't be afraid of the stock market.

    You need to be invested in the financial markets all the time especially when prices are falling, yeah, when the stock market experiences a sudden drop, and it's tempting to panic and sell, but losses can be scary and you might be afraid to lose even more, but selling is the worst possible thing you can do. Stock prices in bare markets fall just for a short time, but in bull markets they rise for a long time really a lot.

    The problem is that there is no way to predict whether a bull market or a bare market is coming next. Oh sure, people claim they know what will happen next, but you have to ask yourself. If that guy is so sure, why is he telling you? The fact is guessing is dangerous. Since nobody knows which days will be profitable for stock prices, it's easy to miss the gains if we're sitting on the sidelines. That's why the better approach is to stay invested the entire time, so that we can catch the profits when they come.

    Want to know how people really lose money when the stock market drops? Well, when you open your monthly statement or check online after the market drops, it's easy to be upset. Feels like you are hard-earned money is disappeared and you are afraid that what's left will become even less. But selling your investments when the market is down is the worst thing you can do and the worst part is that that's exactly what you do, do.

    I have got proof too, data from the investment company institute shows that people deposit money into stock mutual funds when prices are rising and they withdraw their money when prices are falling. They buy high and they sell low. Don't buy high and sell low. Keep your wits about you. When the stock market experiences a sudden drop or a period of sluggishness, don't give an interfere, stay focused on your goals and remember that tolerating occasional declines is part of successful investing.