The past few months haven't been short of hair-raising moments in the stock market. From panic to jubilation, and then back to panic, it's hard to tell what's been going on. A credit crunch, a housing crash, a weak dollar, lower interest rates -- it's a lot to take in.
Regardless of whatever problem pops up, there are several investing myths that resurface during turbulent market periods. Here's just a few of them to think about.
Myth No. 1: You can time the market.
Take it easy, Nostradamus. The stock market can be about as twitchy as a shivering Chihuahua. This year alone, we've had several days when the Dow went up or down more than 300 or 400 points in the blink of an eye. Short-term stock movements are determined by buy and sell orders, and people buy and sell for all sorts of reasons -- not all of them rational.
Whether it's a wealthy CEO selling a large block of shares to pay for a new yacht, a hedge-fund manager looking to jump in and out for a quick trade, or a complete novice crossing his or her fingers and hoping for the best, there is no reason to assume you can predict what people will decide to do in the future.
You also have to take into consideration the out-of-the-blue events that make market timing nearly impossible. Suppose you thought Citigroup (NYSE: C ) was due for a quick rebound after it fell from $48 to $42 per share in mid-October. You gather some fancy candlestick charting program that churns out pretty numbers and tells you Citigroup is bound for success. Fantastic! Back up the truck!
Well, not so fast. Before you know it, Citigroup comes out with staggering writedowns and the ouster of its CEO, leaving investors no less than 20% worse off in the matter of a few days. Ouch.
Once in a while you'll get lucky, but don't kid yourself. You can't time the market. Save the fortune-telling for the good folks at the other end of those 1-900 numbers.
Myth No. 2: Fallen stocks must rise again.
What goes down by no means has to come back up. Many of the homebuilding stocks, such as Beazer Homes (NYSE: BZH ) , D.R. Horton (NYSE: DHI ) , and Pulte Homes (NYSE: PHM ) , have taken gut-wrenching hits in the past year, but that doesn't necessarily mean they're cheap. The past several years were a boon to the homebuilding industry, and it could be many, many years before we see construction return to those levels -- if ever.
When you're looking for a cheap stock, it's important not to fixate on how much a stock has fallen from its high. True, bargains are often found in stocks that have taken a beating, but the amount a stock has gone down doesn't dictate whether it's cheap or not. Baidu (Nasdaq: BIDU ) has gone down some 20% in the past week, yet it still trades at a triple-digit price-to-earnings ratio. In my view, this turkey ain't done cookin' yet.
Myth No. 3: Volatility hurts you.
This is one of the biggest myths in all of stock market lore. The majority of investors will be net buyers of stocks over the coming years or decades. Since most of us plan on being investors for the long haul, you should welcome volatility as your friend.
If you're investing in a retirement account that you don't plan to withdraw from for, say, 20 years, but you plan to contribute frequently to it, the best thing in the world that could happen to you is to have a massive stock market crash that lets you purchase investments at bargain prices. Yet many investors panic and head for the hills at the first sign of trouble, even if they know the trouble will be only temporary.
Yes, we're having a credit crunch right now. Sure, housing is ugly at the moment. But does that mean you should dump everything and put your cash under your mattress? Not even close. When the market becomes turbulent, as it has in the past few months, and your favorite companies go on sale, consider yourself lucky. Look past the short-term noise and think about what the goal of successful investing is -- to make money over time.
Fools, there are plenty of myths out there. Everyone in the stock market wants to make quick and easy money, but in reality, that's not how the world works. Develop a sound investing plan, stick to your guns, and don't be tempted by greed or fear as the market gyrates to and fro.
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