(Newswire.net — April 26, 2020) —
This year’s stock market has been scary. March 2020 was one of the worst months for the stock market and stock prices fell drastically. April has seen some recovery of stock prices, also called a “bounce”, but the climate still remains fear-based and volatile.
WHAT THE AVERAGE INVESTOR NEEDS TO KNOW
If you follow the news daily, there is a lot of bad news being reported. With the virus still around causing state orders of lockdowns, economic activity has severely declined. This may hurt the markets for quite a while. No one knows if we hit the bottom with the panic selling that occurred in March. Volatility in the stock market is measured by an index. When this is spiking higher, stock prices are much more volatile. The day-to-day price ranges are much wider. Prices can fall or rise more than 5 or 10% in just a week! We should expect this higher volatility for quite a while.
Downward pressure on stock prices is a result of many factors. The main factor can be nailed down to uncertainty about the future. When people don’t know what to expect, they normally do not act. They put off purchases. Buying high-ticket items is out of the question. People are not sure about their employment situation or if their business will survive. Economic activity decreases, unemployment rises, businesses go under and people spend less money.
It is said that the stock market is forward-looking. We don’t know if that is factored into the recent drop already, or if prices will fall further in the future. Someone may find a way to contain the virus and stocks will come roaring back in no time. That leaves the average investor with the following question…
WHAT SHOULD THE AVERAGE INVESTOR DO RIGHT NOW?
If you follow the markets, or even just news in general, you are going to hear a lot of different opinions. Some people will say the worst is over and to start investing everything right now or you will miss the opportunity. Others say the markets are going to crash even more in the next several months and we are headed for another Great Depression. Obviously most people are somewhere between those two extremes. Before you go trying to forecast the stock market or just follow what some guru says or does, it is very important to have the right mindset so you can maintain a good perspective when you invest.
First, the average investor should think of investing in the stock market as long-term investing. This way, you will consistently invest and not worry about short-term price movements in the stock market. You only lose if you sell. If you panic and sell when your current stocks are down, you have locked in those losses. With time, history shows that the stock market rises. You actually can buy stocks “on-sale” right now if your perspective is long-term.
Second, the investor must think, am I ready to invest now? If you might lose a job, or you don’t have at least 3 months of cash, then you need to focus on building up an emergency fund. Only invest money that you can afford to tie up now, not money you may need to pay your bills.
Third, the investor should accept that it is risky to invest right now and that prices could drop further. Timing the stock market is impossible, no one has a crystal ball.
I think it is best to keep investing, but not all at once. Prices are much cheaper now, but the risk is still high. I suggest utilizing a DOLLAR-COST-AVERAGING
strategy.
You will invest a portion of your funds each month or quarter consistently at least until the stock market stabilizes and prices are not so volatile. Another option is to invest a portion of your cash (10 to 50 percent) and use dollar-cost-averaging for the rest of your funds. Either way, you are not risking all your investing funds at once, but can still take advantage of lower prices.