Posts with keyword market-fluctuation→
Riding the boom-bust wave
A scientist colleague of mine, a quiet 52-year old fellow with mind sharp as a tack in most earthly matters, has become caught up in the same affliction that many of us get in these uncertain financial times. He wanted to time the market, to make most of the up-down-up cycles of the ongoing fluctuations.
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What is a “security”?
(This post is a part of the series on Basics of Finance and Investing.)
Merriam-Webster Online Dictionary
defines the word security as “the state of being secure”. Then further down, “an instrument of investment in the form of a document (as a stock certificate or bond) providing evidence of its ownership”. These two definitions are not unrelated. A security is an investment instrument that is supposed to secure your financial future.
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It is all about anticipation
And it is all in our brain. Greed and panic – the two primal human emotions – are regulated by specific regions in our brain, and they in turn control how we as investors react to market unpredictability. In an insightful article today, Jason Zweig discusses the latest advances in neuroeconomics, the branch of science that probes human brain to understand investor behavior.
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How fast should my money grow?
Well, there is the handy “Rule of 72″, which says the number of years it takes for the money to double at x% yearly (compounded) rate is roughly 72 divided by x. For example, if you have $10,000 in a money market fund earning a sedate 5%, it will grow to $20,000 in about 14 (=72/5) years. By contrast, if the same $10,000 is invested fully in a stock fund that appreciates at a healthy 10% (not a fairytale), doubling your kitty should take only 7 years.
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Timing a jittery market
Now that the stock market has gotten into another volatile phase – swinging up and down in sync with jittery investor sentiment – the dooms-day forecasters and soothsayers alike have started coming out of the woodwork. There are as many advisers warning us “sell-off time is NOW”, as others saying “the bull market is still on, even though bull run may be over”.
This is also the time when a few market timers catch their lucky break. If stock prices fluctuate without any apparent regularity, by pure chance anyone can succeed once in a while in offloading just before a crash. But market almost always recovers as rapidly as it falls. Kiplinger recently noted that a timer has to be lucky not once, but twice – to get out at a high, and also to get in at the next low. Even that kind of luck is occasionally possible, but consistent market timing would be a rare feat indeed!
