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Investing 101 – The Stock Market Doesn’t Always Go Up

Learn To Invest

Learn to Invest

In my last post I introduced a new series or chapter to Continuously Improving You. I discussed the importance of becoming financially literate and learning everything we can about earning money no matter what happens to be going on in the world. Specifically, to learn how to earn money no matter what the stock market is doing. The traditional or typical way of investing in the stock market is focused on buying stocks and holding them with the hopes that the stocks will go up in value. The challenge here is that the only way stocks are going to go up in value is if the stock market is going up. To insure that we can achieve our financial goals, and more importantly, keep what we earn along the way we need to learn how to invest the traditional way when the market is going up, and we also need to acquire the knowledge so that we can choose investments that we can profit from when the market is going down or when it is going sideways.

If all of our financial education is limited to investing in stocks and/or mutual funds then we are at the mercy of the stock market. As a matter of fact, we are in a position where we are only going to get a return on our investments if the stock market is going up. As I mentioned in my previous post it is common knowledge that the stock market does go up over time, however it is a gradual upward trend. What many people don’t realize is with that gradual upward trend the stock market is down or sideways much more than it is up.

So what do I mean by sideways? It may seem obvious, but it was something that always confused me when someone talked about the stock market in terms of it being sideways. I took a snapshot of the chart for the S&P500 on the day that I am writing this post (see figure 1). It covers the last 6 months. You can see from most of the chart that during the months of December and January the S&P500 was going up. That makes sense. Now notice what is happening from February to today (4/6/11). It kind of goes up and down in a zig/zag pattern. It’s not really going dramatically up, or dramatically down; it goes sideways. :)

Chart for S&P 500 on 4/6/2011

Chart for S&P 500 on 4/6/2011

 

 

 

 

 

 

 

 

 

 

 

If we’re only going to make money in stocks or mutual funds when the stock market is going up, what are we going to do when the market is going down or sideways? Stocks and mutual funds will only go up in value if the stock market is going up. If the market is going down, make sure you don’t own stocks or mutual funds. Again, it may seem obvious, but how many people lost most of their life savings in 2008 when the stock market tanked? Why? Because they didn’t sell. They didn’t have an exit strategy. They held on to all of their stock investments because they hadn’t learned the importance of when to sell. Stocks and mutual funds will only go up in value if the stock market is going up. If the market is going down, make sure you don’t own stocks or mutual funds. It’s that simple. If those people who owned stocks and mutual funds in late 2007 and 2008 had done nothing else but set up a stop/loss order they could have dramatically reduced the amount of money they lost when the market took a turn for the worse. People had to learn the hard way that the buy and hold strategy that we’ve been taught for so long is not the way to succeed with investing. Many people held on to their stocks and mutual funds during the downturn in 2008, and many people lost.

The point here is that if we invest in stocks and mutual funds, and those only go up in value when the market is going up then the key to not losing our shirts when the market goes down is to make sure we sell and get out of stocks and mutual funds when the market tanks. We have to create rules for ourselves and stick to those rules if we are going to control our losses.

Investing is more than just buying and holding, or buying low and selling high. It’s about watching the markets and minimizing our risks of loss. If we don’t learn to sell when the stock market takes a turn for the worst our risk of loss is going to be extremely high. And we will lose our money.

If you get nothing else out of this post I hope that you come away with the desire to learn more about investing and more importantly learning how to minimize your risk in your investing strategy. For those that own stocks don’t become so emotionally attached to your stocks and to the idea of being invested in the market that you don’t have an exit strategy. If you don’t have an exit strategy, go figure it out now. Do yourself a favor and learn what you have to do to sell when the value of your stocks drop. Learn to keep the money you’ve worked so hard to earn rather than losing all of it.

How do we learn this? Ask and ye shall receive… or something like that.

There are lots of good books on investing out there. Browse on over to Amazon and start looking for books on investing. Pay attention to the ratings. Read the samples if they have them so that you can get an idea if it’s a book that is written in such a way that you’ll understand it. Nothing is worse than buying a book, taking it home, and finding out that it sucks.

Also, get on the computer (I know you’ve got access to one since you are reading this) and start looking for web sites that cover investing. Seek what you want and you’ll eventually find it. I did my share of research and one of the sites that I came across that I’ve found to be pretty darn awesome is www.investopedia.com. They have some great tutorials. Do yourself a favor and go there, go to their tutorials section and start continuously improving your financial education. http://www.investopedia.com/university/beginner/


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