Predicting the direction of the market is like predicting when you will hit the bulls-eye in a dart game. The majority of the time throughout market history, the markets have been rising. History shows that the chance of your money growing in a diversified portfolio of stocks and bonds is much like the odds of your next dart hitting any number on the dartboard... except the bulls-eye. If you are going to try and time the market by moving your money in and out, you have to ask yourself how confident are you that you can hit the bullseye when you do.
In simple terms, speculators are trying to out-smart the markets while investors simply participate in the markets. The investment time horizon is also a very important factor as speculation tends to be over the short-term while investing is over the long-term.
The S&P 500 or the Dow Jones Industrial Average are not reality. Reality is not price-to-earnings ratios and technical market studies. Symbols on the computer screen are not the real world. In the real world, companies create wealth. Stock certificates don’t. Stock certificates are simply proxies for reality.
The general economic model of a recession is that when unemployment rises, consumers are more likely to save than spend. This places pressure on businesses that rely on consumers’ income being spent. As a result, company earnings and stock prices decline, which can fuel a negative cycle of economic decline and negative expectations of returns.
I’ve been asked many times “if Dave Ramsey says to fund a Roth IRA, why would I ever choose a traditional IRA”? Well, much like any advice, there is no absolute in reference to what will work best for everyone in every situation. Let’s examine the main characteristics of both types of IRAs. As...
We so desperately try to nail down certainty in every area of our life but this pesky thing known as reality gets in our way. The realities of life refuse to conform to our desire for certainty. We make plans for our lives and then reality "happens" and throws a monkey wrench into our plans.
Just like we do not know when we are in a recession (until after it has started), the markets begin their recovery in the midst of bad news. It is critical top your wealth to understand this fact: the markets (stocks & bonds) typically reflect where the economy is headed in 3-6 months from today. If you wait for the news to tell you the markets have recovered, the economy has turned around you probably missed out on a good portion of the initial recovery.
Most of us make the same mistake with our money over and over: We buy high (when the economy and markets are up) out of greed and sell low (when the economy and markets are down) out of fear, despite knowing on an intellectual level that it is a very bad idea.
$10,000 is still $10,000 = Capital Preservation $10,000 still buys what it did = Purchasing Power Preservation The distinction is vital to your long-term wealth! Not a month goes by that we do not have a call where someone inquires about investing and includes the phrase, “but I don’t want to lose my money“. The...