I have over thought this area of finance, so please forgive the depth to which I go.
The stock market is a reflection of worldwide growth or contraction of companies. The growth or contraction is in number of employees, real estate, plants, trademarks, secrets, and any other tangible or intangible asset. The stock market, as measured by the Dow Jones Averages, has grown from 610 to 12,414 over the past 50 years. Your investments in the stock market, had you left the money in the market and reinvested your dividends, would have grown nearly 25 fold or 2,500 percent!
That said, how could you best benefit from the growth of business around the world? Based on history, stay the course.
Consider what has happened in Europe in the past year. Every week there is a calamitous prediction of the end being nearer and nearer. Simultaneously, the stock market has reflected wild swings in the businesses of the world. This is a phenomenon I like to call, “The Heart of business is beating wildly”.
During the past year, if you had stood the course of investing in solid companies that have worldwide exposure, you would have done ok. What this says, is that in the past year, according to the “reflector” of business i.e. stock market, things have been ok, not great, but ok.
Put another way, if you were 28 years old and in the Silicon Valley, you would have thought God chose you and things are fantastic, right? Yet in Spain, if you are 28, you are probably unemployed and ready to lose it. Thank God for Sangria, no? So add up the situations for these two people and divide by two and you get ok. Worldwide activity of businesses is analogous to these two 28 year olds when you average them out, which is ok.
In any event the market truly reflects the world of business, and over one year or over 50 years the stock market has performed admirably by reflecting what it “sees”. What you have seen in volatility, or huge moves up and down over the past year reflect what is going on in our trading partners’ countries economically. A 250 point move in the Dow Jones Averages lets you know things are occurring to businesses in the world that make investors jittery. Like the first day of class we all get jitters, they will pass too!
Here is today’s lesson;
1.Think very long term, not 3 months or even one year,
2. Stay the course and consider The Teacher’s Pocket Guide to Finance’s lesson about dollar cost averaging, and
3. Jitters are for the new kid; you are cool, calm and collected.