Lessons from the Stock Market Swings

CAT Lessons from the Stock Market SwingsYou are probably aware of the drastic swings that have occurred in the stock market for the past two weeks.  One day it’s down 600 points, the next day it’s up 400.

It can be pretty difficult to decide what to do with your investments.

The premise of this blog – the reason I started it – is because I wanted to take an active interest in our nest egg and intentionally start building wealth.  The main avenue I considered for increasing our savings was the stock market.  I decided that if I put my mind and attention toward learning some financial (investing) savvy, that it would be a better use of my time and interest than taking a pottery class (although I still want to do that too).   The typical advice for someone my age (30 years till retirement) is to just invest regularly, ignore the blips and let things ride.  I decided that I may be able to bump up my return on investment a few percentage points by putting just a tiny bit more effort into it than ignoring our investments completely.

Good intentions aside, I haven’t been diligent about studying up on stocks.  But the potential default on August 2nd woke me up a bit and reminded me that I wanted to take an active interest in our investments rather than just “letting them ride”.    So that’s what I did.

I was even quoted in the Wall Street Journal’s article about my actions during the wild ride the week of August 1 through 5.   If only they had linked to my blog!  Ah well, next time.

Stock Savvy or Stupidity – Too Soon to Tell

Since Saving to be Rich is about learning and sharing successes and failures, I wanted to give you an insight into my reactions and thought processes in these turbulent times.   Enough time hasn’t gone by to determine if my moves were brilliant or moronic yet, but here’s what I did and why:

Friday – July 29th – is when I was reminded about my goal to take an active interest in our stocks.  All of the news coverage of Senate and House negotiations and deals was what got me thinking.  And what I thought was that the stock market had a decent potential to react negatively in the next week and I didn’t want to ride that downward cycle if I didn’t have to.

So I sold my stocks (CAT, CTSH and AAPL) and transferred 100% of my 401K into Templeton Global Bond Fund (TPINX).  It is a fixed income International Bond fund.  I must admit I wasn’t quite sure of the implications (how the global economy reacts to US events, etc) – but it seemed like the option available to me (from our 401K funds) that was stable, based on bonds and not based on anything in the U.S.

Here’s why I thought the stock market may react negatively the closer we got to August 2nd:

  • There was a lot of uncertainty about the negotiations and lots of media coverage amping up those nerves.  Uncertainty tends to result in sell offs.
  • The news was full of talk about our $14 Trillion debt which I assumed may make investors uneasy about our long term solvency as a nation.
  • There was a potential we may default on our debts, which I assumed would put the stocks into a tail spin.

On the flip side, I didn’t see anything coming out of the negotiations and potential default that would cause the stock market to soar upward.  If anything, I thought best case scenario it wouldn’t react at all and would continue on normally.  If that happened, all I would be out would be my trading fees $9.99.  I thought it highly unlikely the market would spike upward so that I’d miss the potential for huge gains.  So decided to sell.

  • CAT at $98.91
  • CTSH at $69.57
  • AAPL at $391.30

The current price of these stocks is:

  • CAT $89.81
  • CTSH $64.60
  • AAPL $376.99

Saving:

  • CAT 9.2%
  • CTSH 7.1%
  • AAPL 3.7%

My 401K is down about 4% from where it was on July 29th (when I transferred it to TPINX).  The S&P 500 for that same period is down about 9% – so I think there was some loss – about 5% – averted there.

What does this all mean?

Nothing.

I am not retiring today, so all of this mean nothing.  If I wait too long and miss the stock market’s rise back up then I will likely lose a whole lot more than I saved here.  The name of the game is investing.  That means being IN the stock market.  I fully intend to buy stocks back in the next couple of weeks.  I would like to see the market settle a little (preferably low) and then jump back in with both feet.

What did I learn about the stock market?

Paying attention to potential dips may pay off long term.  Active involvement doesn’t take much time, and the rewards are potentially high.  However, getting scared and being afraid to invest is more crippling than taking a few losses now and again.  So, you should stay invested, but that doesn’t mean you have to ride every drop – not if you can see it coming.  What will I do?  Continue to learn.  Continue to practice investing.  Continue to pay attention.

How did the past couple of weeks affect you?

*I first published this article on Technorati as  Lessons from the Stock Market Swings 

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