You Need to Change How You Think About Stock Investing


You are 35 years old. You have saved $100,000 over the years and have invested it in the stock market, hoping that it will help you finance your old-age retirement. You are adding $10,000 to your account each year.

You read an article in a money magazine in which an expert says that he thinks that market prices will be falling by 50 percent this year and you curse your bad luck. Then you see that the magazine also included an article putting forward the opposite point of view, that market prices will go up by 50 percent this year. That one puts a smile on your face! If prices go up by 50 percent, your portfolio value will shoot up to $150,0000. Wouldn’t that be great?
No.
It would not be great.
It would be terrible.
I have a calculator at my web site that lets us examine the long-term effect of these two possibilities. It’s called  The Returns Sequence Reality Checker.  If we assume that stocks will continue to perform in the future somewhat as they always have in the past (that is, that we will see a long-term return of something in the neighborhood of 6.5 percent real), we are all a LOT better off if stock prices fall 50 percent next year than we are if they rise 50 percent next year.
$2,106,761. That’s what you will see as a portfolio value when you turn 65 if we see a 50 percent price drop this year and if you continue to make $10,000 contributions in each of the next 30 years.
$1,355,021. That’s what you will see as a portfolio value when you turn 65 if we see a 50 percent price rise this year and if you continue to make $10,000 contributions in each of the next 30 years.
$751,740. That’s the difference between the two numbers.
If we see a 50 percent price drop rather than a 50 percent price rise, you will end up at the end of three decades richer to the tune of nearly $800,000. Yet you are rooting for the price rise! Almost all of us are! What gives?
What gives is that our thinking about how stock investing works is terribly messed up. I believe that it is our messed-up thinking about how stock investing works that caused the economic crisis. I am hoping that we will all soon begin working together to develop smarter and better-informed ways of thinking about how we invest our retirement money.
Most people are shocked to learn that stock-price drops are better than stock-price increases. I ask that you try to take a step back and to understand why it makes perfect sense that this would be the case.
Stocks are something you buy, right? You will be buying stocks regularly for the next 30 years if you are 35 today and plan to retire at age 65, right? Is it generally a good thing if the things you are buying regularly are available for sale at low prices or at high prices?
Low prices are better! Always! No exceptions! We all love low prices!
Except when it comes to buying stocks.
When it comes to buying stocks, our brains go haywire. When it comes to buying stocks, we root for high prices. That get us into a whole big bunch of trouble.
It’s because we all like price increases that stock prices went so insanely high in the late 1990s. And it’s because prices went so insanely high that stocks have delivered poor returns for 13 years now and are still today priced for at least one more price crash. We allowed stock prices to get too high. And we did it because we think of high prices as a good thing rather than a bad thing.
We need to start thinking about stock-price increases as a bad thing. We need to come to appreciate how low prices are just as great when buying stocks as they are when buying all other goods and services.
I believe that what confuses us is that we all own stocks and we assess our chances of being able to retire by looking at the current value of our portfolios. We shouldn’t do that. We should only be concerned with future values. It is being able to buy stocks at low prices that lets us acquire more stocks and thus to be able to retire much sooner and in much more comfort.
When you negotiate with a car salesman, you know that a high price benefits him and that a low price benefits you. That’s the attitude you need to apply to the stock-buying process too. You need to root for low prices, to demand low prices, to refuse to buy stocks when prices get too darn high.
Don’t be fooled by the fact that a price increase of 50 percent will increase your portfolio value by $50,000 next year. That’s chicken feed! A price drop will increase your portfolio value by nearly $800,000 at the end of 30 years!
It’s by buying stocks at low prices that you acquire the wealth needed to achieve financial independence. Reports of falling stock prices are good news to those of us still in the process of financing our retirements. It’s when prices rise that we are being ripped off.
Don’t make the $800,000 mistake. Never again get excited by rising stock prices. You want to buy stocks in the same way you buy everything else. You want to buy stocks  on sale!
Rob Bennett argues that  the true cause of the current financial crisis  was the popularity of Buy-and-Hold investing strategies. His bio is  here.  

Written by Jon the Saver

This post was written by yours truly, Jon Elder. My mission is to help you succeed in your personal finance life. Join me on the journey to financial freedom! You can subscribe through RSS FEED or EMAIL updates. You can also find me on TWITTER
and FACEBOOK
. Happy investing 🙂

Jon the Saver

This post was written by yours truly, Jon Elder. My mission is to help you succeed in your personal finance life. Join me on the journey to financial freedom! You can subscribe through RSS FEED or EMAIL updates. You can also find me on TWITTER and FACEBOOK . Happy investing 🙂

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