Lessons from stock-market volatility

August 10, 2011

Didja see? Stocks went down, and then they went back up again. If you just spent the entire period lying in blissful ignorance on a beach, then you would have saved yourself a lot of stress and panic. And there was very little in the way of actual news, either. The scandal isn’t that S&P might have told banks and hedge funds it was going to downgrade the US: the scandal is that S&P told everybody, repeatedly, that it was going to downgrade the US, and the markets ignored the news until it actually happened. Similarly, there’s precious little actual news in the FOMC statement — certainly not enough to move the market by 5%.

So as ever, the best thing to do, if you’re saving for the long term, is to just keep on putting a small amount of money into the stock market every time you get your paycheck — and to ignore short-term stock-market gyrations. The stock market, at some point in the future, will be lower than it is now. And at some other point in the future it will be higher than it is now. We mere mortals can’t hope to time such things.

All we can really hope to do is put our money somewhere where it’s more likely to earn a decent real return over the long term than it is to get eroded away. And there’s simply no way that bonds or cash are superior to stocks on that basis, given their current yields of zero.

Obviously, the stock market is a dangerous place for short-term speculation — and if you can’t afford to see a 5% drop in one day, or a 20% drop over the course of a few weeks, then you shouldn’t be investing in stocks at all. It’s not a place for money you’re likely to need to spend any time soon. But if you’re a long-term investor, the one advantage you have over the big institutions is that you don’t mark to market, and are therefore less likely to be forced to puke up liquid and valuable stocks when markets fall. Take advantage of that, stay calm when markets get volatile, and over the long term you’ll be glad.


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