Some considerations if you are considering dipping your toe in the stock market…
There has been a lot of talk about the stock market this year- and it has been quite the roller coaster ride! (note: if you do not like roller coasters, the stock market may not be the place for you)
Both the S&P 500 and DOW have taken similar routes- a steady increase from January 1 to the lockdowns in early March, then a steady increase back to (or above) their pre-COVID prices.
Now, before we go any further, let me remind you: ***I am an educator, not a broker or advisor, so use this as part of your knowledge tools, but nothing is meant to be used as advice. I am here to empower you to make the best decisions for yourself***
Okay, now that my attorney is happy, here are a few reasons for what has happened year-to-date.
There has been the expectation of a stock market correction (fancy words for a decrease) for a number of years.
If you look at the stock market graph over the past century you will see it goes up and it goes down, but has gone up overall. Just like the land, it is not expected to only go steadily up.
Initial COVID fears caused investors to liquidate their shares for cash. Remember six months ago when there were predictions that the entire would come to a screeching halt, the banks would fail, and we would find ourselves back in the Stone Age? I may be exaggerating a little, but that was the gist.
But the world did not end. Some people had been waiting for stocks to go on sale. Others found they had extra money now that they were not traveling or commuting. So they bought boats, cars, horses, houses, land… and stocks.
It has been a great time to invest and to borrow. Interest rates are at levels not seen in many of our lifetimes. You can buy a brand new car on sale with 0% interest for 72 months. Mortgage APRs are also extremely low- some below 2%.
This demand has led to what is considered to be an overvaluation of both stock and housing prices. And, historically, these “bubbles” eventually burst.
Tesla is a prime example. It went from $100 in January to $500 just yesterday and today it closed at $400. There were some other reasons for that, but when you consider where other major auto makers are, there is no good reason for Tesla to be that high, as super cool and fun to drive as they are…
If the bubble bursts, people are going to find themselves with houses worth less than they owe (underwater) and stocks worth less than they were purchased for.
Both are okay if you are in it for the long haul and if the value eventually recovers. There are no guarantees for either. But it is likely because historically that is what has happened.
So, what can you do?
That is ultimately up to you. If you choose to purchase some stocks the age old advice still applies: buy something you love from a company that aligns with your values and passes the Motley Fool “snap test” (if you snapped your fingers and it disappeared people would miss it). Plan to hold on to it for the long haul, but do not be so attached that you go down with the ship if the writing is on the wall. And never invest what you cannot afford to lose. Because even the biggest company can fail (remember Sears?).