Over the past few weeks, markets have been moving around so quickly that gains of 5-10% can go away within a few hours. It’s not clear what is causing this. Sure, there are important worries about a few different things including sovereign debt. Will Italy, Spain or others end up being unable to pay their obligations and what would that lead us into (hint.. it would be very bad)? It’s difficult to get a clear image. Why? Because the speculation is about events that are several years away. If that is the case, how is it possible to explain that the market rises 4% in a few hours only to reverse the next day? What is different from yesterday? Did Italy, Spain and others find some treasure that will dramatically change their future? Probably not.
I always find it interesting when the media tries to explain what is happening in the markets.
Day 1 – “Markets jumped off a cliff over concerns that the European debt crisis will spread”
Day 2 – “Markets move much higher after the Fed announces rates will remain low for 2 more years”
Honestly, what is new here? Sure, there are a few elements and the Fed does give its impressions. But is that enough to dramatically change our long term perspective? I mean did anyone think the Fed was going to rise interest rates in the near future? Or that the Fed would tell investors it would stand on the sideline if required? It seems like every day the media would be able to explain an important rise or a crash.
I personally think that the most important factor is that electronic trading have made all trading much more volatile, and any small movement can go significantly further than it did in the past? Why? Because these electronic programs often take decisions based on momentum so a 1-2% decline will be seen as a significant possibility of something bigger. Then what? These programs will start selling even more, shorting stocks in order to profit from the decline. It happens so quickly but with everyone jumping on the bandwagon, it does indeed help markets to move south.
How Do You Judge Action In The Markets?
Personally, I think it’s important to try to keep the big picture in mind. A 5% increase means nothing as does a 5% decrease. In dividend investing, I worry about the company’s revenues, profits and how those will grow over time. Will Apple (AAPL) sell significantly more or less of its units in the next ten years based off of news in Europe today? It might make a difference, but 4-5%? Probably not no.
How Do You Act When Markets Are Crazy?
I have some friends that wait for these moments to jump in the market. Any significant drop translates into a big buying opportunity. Unless we get stuck in a Japan like scenario, that is likely to be true. I would simply caution to only put a portion of your savings to work. If the markets decline by 10% and you put everything in, are you able to support a 10-20% further decline? Or would you keep money on the side to put it in when that happens?
My Boring Perspective?
Personally, I do not worry about it much. A 5% increase or decrease will not have much impact, make me think that the market is overvalued, undervalued or make me create any drastic action. It does make things more interesting from a trader’s perspective but that’s just about it. So if you ask me what you should do following yesterday’s action on the markets. My answer will simply be: “Stick To Your Long Term Plan“.
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