The markets are going crazy these days: commodities, gold, silver, the stock market, real estate. How can you keep up? What should you do? Any change in the world condition can make the market react either positively or negatively. Osama is killed and the market goes up. The President makes a speech on Libya and the market jumps. A new poll comes out and the market dips. Seems like about anything can set it off driving the indexes either up or down. There is even a new computer program that is being talked about to help in making stock market predictions based on twitter tweets. It is said that they can determine the “mood” of the masses by analyzing millions of tweets and that will help them predict market conditions. Market intelligence gained from tweets. It’s a sad day when much of anything that is tweeted can be considered “intelligence.” Yeah, I know, I tweet too and I have thousands of followers (you should be one) but I do my best to give a 140-character nugget that actually offers something to help you do better, be better or at least cause you to think. I don’t tweet the typical “I’m hungry” or “I’m sad today” like some folks do. (Eat a damn sandwich or keep your lousy mood to yourself, I’ve got my own crap to deal with!!!)
The problem is that people actually pay attention to these temporary fluctuations in the market and try to time their way into making money by jumping in or out based on what’s going on in the moment. They are constantly reviewing their portfolio to see where they are day by day. They get upset or sometimes even elated by the daily changes that take place. Then they want to buy or sell and are on the phone to their broker or worse, trying to handle it all by themselves like they are smarter than everyone else in the financial world. Don’t do that. Investments should be based on trends and track records and those things take time to develop. And unless you are a seasoned investor and really know what you are doing, don’t try to time the market to make money. The odds are not in your favor.
Market fluctuations are based on emotion. Money has no emotions but only reacts to the emotions of people. That’s why we see all the craziness going on in the markets right now; people’s emotions are running high for many reasons and the market is reacting to it. The key is to not play into the market fluctuations by letting your emotions dictate your financial strategy. These fluctuations make no difference to the average investor. These fluctuations are temporary, while your investment strategy should be long term. And remember, emotional decisions are not often your best decisions in any area of life, but especially when it comes to money. When you buy or sell stocks based on emotions or when you are in a panic, rarely will you make a good long-term financial decision.
Your financial security is a long term strategy so get back to basics. The same old boring fundamentals for financial success still apply regardless of what is going on:
* Have a cash cushion equal to six months of your expenses.
* Before you even consider investing, make sure you have all high-interest debt, like credit card debt paid off. People often ask my opinion about good investments with high yield. I always ask if they have a credit card balance. Since the average credit card debt per household is still about $7500 and the average interest rate is about 14%, I remind them that the fastest way to get a 14% return on thier money is to pay off their credit cards. Again . . . do not invest a dime until your credit cards are paid off. It’s DUMB.
* Make sure you are spending less than you earn, which around 40% of people still aren’t doing.
* Have a long term strategy for financial security. Work with a qualified financial adviser who knows you and your situation and will help you achieve your long term goals. Prosperity is a process and a slow one at that.
And by all means, do not panic when you see temporary fluctuations in the market. Take a deep breath, stay calm and stick to your plan – and if you don’t have a plan, get one.
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Great advice. It is scary how few people live within their means. Too much risk. For some, they are one paycheck away from disaster. The only thing I could add (which you speak about in previous posts) is to increase your income, but regardless, you absolutely MUST spend less than you make. Personally, I feel that everyone should be spending in such a way that would allow them to save for their future and give money away to charity. There are multitudes of people in the world worse off than the people that are reading this post, I guarantee that. Thanks
Love the advice, Larry. If you fail to plan, then you’ve planned to fail. Sometimes, people get so caught up in having the latest, greatest and flashiest, that they don’t realize that the simplest plan is usually the most rewarding.
Great article Larry. My thoughts are that the only thing that will turn this economy around is for every household to pay off debt and get a big pile of disposable cash that is not earmarked for anything. Cash that we can go buy something, pay cash and do it without regret or fear. Until we do that and get our money (not borrowed) moving, nothing will change. If it takes cutting expenses, earning more by adding value to what we provide or working harder or smarter, that’s what must happen.
Optimism may be at the root of this. We’re convinced we’ll get more money tomorrow, so why not spend today? We’re also convinced we are financial geniuses, so of course we’ll borrow money to buy that sure thing investment that will pay us 5% a month.
It’s sad when optimism is the ruin of a society, but I think that’s the big mental block you have to fight, Larry. People simply won’t say no to their desires today if they believe that everything will get better tomorrow.