February 26, 2013

Half-Full or Half-Empty?

Credit: photostock
I’ve said time and time again on this blog that I can only speculate about how the stock market is going to perform in the short term. I can use my education, I can use my training, I can use my experience, and I can read, watch, and listen to what a lot of other much-smarter people are thinking and saying, but the truth is, I can only rationally speculate. However, as far as long-term performance, I’m much more convicted in my beliefs as to where the market will end up, and if you don’t share my confidence, I’d urge you to look up where the Dow Jones Industrial Average (DJIA) was on your date of birth versus today.

Look, I’m not here to beat an optimistic drum about how the stock market is going to do in the short term. I’m writing this post to remind you to be careful about how you act on what you hear about predicted changes in the stock market. We’re exposed to so much conflicting “noise” out there today from the television, radio, and various forms of social media that it’s hard for anyone to keep their head on straight, myself included. But what has become clear to me through the contradictory chaos is that some people are actually investing based on the “noise.” Why else would some intelligent people seem to want to bet wildly on a market rally in the very near future, while at the exact same time, some other intelligent people are heading for the hills and diving headfirst into precious metals, treasury bonds, and cash? To answer that question, let me show you how portions of one chart can be manipulated to make all kinds of different “noise” that might entice an individual to make very different portfolio decisions.

Chart 1- DJIA 5 Year Chart as of 2/22/13 from Yahoo Finance:

What’s your gut reaction to the chart above? Are you imagining an anxious guy in a disheveled suit screaming “The end is near!” at you? Are you envisioning those sign-twirling, “We Buy Gold” people on street corners? I can certainly see how this chart might make someone buy into a “what goes up must come down” investing approach in the short term as it appears the blue line might be overdue for a fairly severe pullback based on the time frame shown.

Chart 2- DJIA 3 Month Chart as of 2/22/13 from Yahoo Finance:

What about this one? It kind of looks like a never-ending version of the Price is Right’s “Cliff Hangers” game to me. I can certainly see how this chart might make someone start looking underneath seat cushions for additional funds to invest in the short term. It does appear the sky could be the limit for the blue line based on the time frame shown.

Chart 3- DJIA 1900-Present Chart as of 2/22/13 from stockcharts.com:

Finally, take a look at this chart. Remember what I said about my being more convinced about where the market will end up long term? This one shows why.

Look, I don’t know what the market is going to do in the short term, and neither does anyone else. Hopefully, as my very simple charts have shown, you can always look at the stock market as a whole, or almost any individual investable asset, as a glass half-full or a glass half-empty. Even on Wall Street, professional investors differentiate many credible people’s very different viewpoints and forecasts by calling some bulls and some bears.

There’s a lot more to successful investing than looking at historical charts, but I believe doing so shows why everyone needs to beware of the “noise” out there. Quite frankly, there are a lot of people who don’t know what they’re talking about. There are also a lot of people with polar opposite positions who do know what they are talking about. I hear the same “noise” you do, but I stay grounded when I think about a long-term outlook with a diversified approach, and good ol’ chart number three.

If you’re prudently invested, ask questions and follow up on what you hear, but please don’t let one, random piece of “noise” cause you great emotional distress. Worse yet, please don’t let one, random piece of uninvestigated “noise” cause you to have a knee-jerk reaction and potentially jeopardize your financial situation. Remember, the guy on the television might just be showing part of the chart.


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