How to Make Sense of the Stock Market

Unless you happen to be a trader or an expert, to many of us, the stock market moves in very mysterious ways and is exceedingly difficult to understand. Financial advisor and expert Ric Edelman of Edelman Financial Services is ready and able to demystify it for even the most novice investor.

Stock market disasters

For many people, the very words “stock market” aren’t particularly positive: they’re often followed, in our minds at least, by the word “crash.” That terrible event of 1929 was the beginning of the Great


Depression, and many of us grew up hearing our grandparents tell stories of just how awful that was: many, many Americans were bankrupted as stocks went down by 50% in a mere 17 days. Still more found themselves jobless, homeless, barely able to feed their families. A few took their own lives in despair. More recently there was bad “stock market” news again, the infamous Black Monday of October 19th, 1987, when stocks went down 23% in one day only.

However, these are two events that took place within the span of a century, which means that they can’t be seen as normal. What stays in our mind aren’t all the airliners that land successfully: we remember the ones that crash.

Edelman points out that it isn’t just the disasters that are keeping people out of the stock market. There are two major myths, one of which relates to those crises, which keep people away from making investments that could truly improve their lives.

The mythsq2

The first myth, which reprises the fear of disasters, is people believing that the stock market represents a terrible risk, and that it’s volatile. The second myth is that they believe that stock prices rise and fall.

While over the course of a day stock prices will indeed rise and fall, the reality is that no one invests for a day, and over time they tend to rise steadily and, when they fall, they fall for only a short period of time. Daily or even monthly changes in the stock market are irrelevant to the investor who plans to keep their money there for a longer period of time: over time, there is in fact relatively little risk, and gains are steady and clear.

How to invest

The truth is that it doesn’t matter what the stock market does today. Or tomorrow. Or next week. If you’re investing in order to meet a long-term goal (say, retirement, or putting your daughter through college), then daily blips are just that—blips. What you’re interested in is what is happening over longer periods of time. Since 1926, the SMP500 stock index has gone up (that means it’s made money) 95% of the time. 95%! That’s a pretty safe bet, wouldn’t you say?

q3 It’s important to stay the course and bear that number in mind. Too many investors panic when stocks take a sudden drop; they sell what they have, frightened that the market is going over the edge of a cliff. You have to keep your nerve, because they will come back up. Perhaps not the next day; but over time, they will. It might be scary to watch, but acting on panic is far scarier for your portfolio!

Stock prices in what are called bear markets (a market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining) fall just for a short time, but in bull markets (a market in which prices are rising or are expected to rise) they rise for a long time.

The problem is, of course, in predicting whether the market is going to be bearish or bullish. A lot of people will claim to know what’s coming, but the reality is that nobody knows.

And that’s another good reason for staying the course: since we can’t predict, we do better to sit tight and watch it getting better over time.