Market Psychology
Today we are inundated with tons of information about the economy, stocks, government agencies and foreign governments. They show us charts and graphs of the increase/decrease in oil production over the last 5 years, the amount of maple syrup produced in Vermont for the past century, the time it takes to bounce a signal off the moon and all kinds of other nonsense that we can live without. The talking heads on the investment programs, both radio and TV, tell us how this is going to affect the price of certain stocks and the market in general. Well, maybe.
When you step back to get a better view of the market because the trees are in the way you really get a different view. No matter what stock or mutual fund you own there is one important factor that is causing all of them to change. It is the mass thinking of all the people who own equities of any type. The stock market is a reflection of this mass thinking and causes changes in human behavior. This mass thinking does not necessarily reflect what the economy is doing at any specific moment.
Take the euphoria of stock buyers at the end of 1999 and the beginning of 2000. All the mass psychology was bullish and everyone knew the market was going to go higher. The economy knew better and stocks headed down. The market was a reflection of what we could not see.
Currently many people are becoming bearish and think the market is headed lower, but no one really knows until after the fact. It is dangerous to be either bullish or bearish at this moment. So what is the best course of action when you are not sure of what to do with your money? Keep in mind that protection of your capital, especially your retirement money, is a prime consideration. If you own a stock now that has been going up you don't want to sell it, but you can protect yourself against loss and lock in profit by placing an Open Stop-Loss Order with your broker. Keep moving the stop up as the stock goes higher.
If you have a stock or fund that is going down you must either sell out or place an order to get out if it goes down further. Usually 10% is about right. If your stock is $40 place your stop at $36.
If the mass psychology becomes too negative it can cause massive selling and even the best equities get flushed. All boats go down when the tides goes out. If you do not have a loss limit in place at all times you will lose your investment capital. The example of this was what happened when the World Trade Center was destroyed. Selling was caused by mass psychology and had little to do with valuation.
It is a herd instinct and you don't want to be led to slaughter will all the other dumb animals. Protect your money. Put in a stop today.
Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.
Copyright 2005
al@mutualfundstrategy.com; 1-888-345-7870
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exitingMore Stocks & Mutual Funds Information:
Related Articles
How to Find Value in No Load Mutual Fund Investing
What are you thinking when it comes to your no load mutual fund selections? Are you saving pennies and sacrificing dollars?Are you spending your time looking at expense ratios, analyzing Morningstar ratings and searching for funds with low fees and no 12b1 charges? If you are like most people, you know these things in and out. You've spent hours evaluating them, and your chosen mutual funds cost little to purchase and maintain.
Expense Ratios
Mutual funds and brokers are always preaching not to buy any fund with a high expense ratio. That is the annual costs of the fund to pay for trading of stocks within their portfolio, salaries, rent, telephone, analysts, etc.
I Love You, Warren Buffet
Sometime around 1980, can't remember exactly, there was a flight of money from many countries to Switzerland. The clock makers had so much money pouring in that the banks took interest rates to zero and even for a period of time were actually making you pay ½% interest to them to put your money in their banks.
Ignore Stock Market Talking Heads
You should ignore analysts on TV, the radio, the newspaper and all other TALKING HEADS when it comes to investing! What stocks do they talk about? - The same old group, every day of every year - Why? Because they don't know any better, they are sheep like the general public, repeating what every economic textbook says and every other economist tells them to say. Everyday, the same companies are highlighted on the evening news -WHY?They aren't going anywhere.
Diversification
Wall Street's watchword has always been diversification, but what does it mean and why do they say it?The standard Wall Street definition is flexible because each broker or financial planner will vary the portfolio based on your age and income. They say that the younger you are the more risk you should take and the older you are the less risk.
Stocks Options Trading
Let's assume that you want to make some serious money and you have chosen to take things into your own hands rather than depend upon a "professional trader" to make your trading decisions. This is usually only recomended if you can afford to lose the money that you are trading with, and you appreciate the fact that there is much more upside potential with this added risk.
Perfect Storm
Having lived aboard a sailboat for 2 years I was stricken when I saw the movie "PERFECT STORM". I know these are things you want to avoid at all costs.
The Bottom?
Every day I hear someone on CNBC proclaim that "this is the bottom" and you should get in there and buy all those "bargains". "The valuations of the DOW stocks are a steal.
Understanding the Bulls and the Bears
If you've ever flipped on the television to CNN Financial or paged through the finance section of your local newspaper, you may have seen or heard references made to "the bulls and the bears." If you didn't know what was meant by those terms, you're about to find out.
Successful Trading - Establish Your Risk Level
Before you embark upon a journey of trading stocks or futures, and before you make any trades, you MUST determine and establish your risk level. Traders that fail to do this are usually doomed from the start.
Quality Investment Information: Standing Firm In the Face of Opposition
THERE'S SOMETHING TO BE SAID FOR standing firm in the face of opposition. Interestingly, most of the best stock decisions have come at times when the mainstream is saying precisely the opposite.
Stops Make Money
During the day I watch CNBC-TV, the stock market channel. Fortunately, I keep the sound muted or I would be hollering at the dumb "experts" being interviewed.
Rebalance And Diversify
The stock market has not been very kind to your investments lately. Your broker knows this so you may have received a call from him suggesting it is time to 'rebalance and diversify' your portfolio.
Prospering with Mutual Funds: How Anyone can "Afford" an Investment Advisor
Recently I was invited to appear on a live CNNfn television show to discuss my article "How to evaluate Load vs. No Load Mutual Funds.
How To Pick A Mutual Fund
Mutual funds by definition are a mixed bag of stocks, bonds and a little cash. Their price per share is the NAV, Net Asset Value of the total amount of money in the mutual fund divided by the number of shares.
The Golden Goose is Sick
It is finally catching up with them. The brokerage companies I mean.
Commoditizing the world
Let's discuss commodities; with the latest Enron situation, it is important to understand the way things work. A commodity is anything useful, especially a transportable agricultural product or mining product.
Option Trading Basics
Options trading can increase the profits you make when trading Stocks if you understand how to use them and know what you are doing. Options can be a very useful tool that the average investor can use to enhance their returns.
How to Short Stocks? How to Make Money when Your Stocks Go Down by Shorting
The stock market can present you with a lot of hot stocks every day. Many of them are new technology stocks that come from the nanotech, biotech, voip, healthcare, homeland defense or internet sectors.
Patterns
The Law of Chaos is the theory of random unpredictable action applied to the cosmos, mathematics, mechanics, almost everything. Those who believe it will definitely think the stock market is in chaotic state at this time.