For a few months there has been a lot of gloom and doom commentary about the stock market. Prices have come down dramatically. The S&P500 index is down about 14% from its October high. It’s hard to tell if falling stock prices are responsible for the gloom and doom, or vice versa. Probably both.
I find it fascinating that everyone feels better when stock prices go up. Whether it’s the anchor on the nightly news, Ben Stein, or your barber, everyone seems a little happier when stocks are up.
But should we feel better when stocks go up?
Stocks Are Like Gasoline
To understand how stock prices affect your life, you should think about gasoline. The price of gasoline has shot up dramatically. It was just a few years ago when gas at $2.27/gallon was considered sky high at the Menlo Park, California gas station pictured on the right. Now the same station has gasoline at more than $3.60/gallon. $3.59/gallon this morning.
Who feels better when gasoline prices go up? Not me. Not you. Not anybody that drives a car or operates a lawn mower. Unless they also happen to sell gasoline for a living.
Anybody that sells gasoline loves high gasoline prices. Why? Because high prices means more revenue for each gallon sold.
We can sum it up as follows. Buyers don’t like prices going up. Sellers do.
Back to Stock
What does gasoline have to do with stocks? They both have a price. They both get bought and sold.
Just like buyers of gasoline, buyers of stock shouldn’t like prices going up. And just like sellers of gasoline, sellers of stock like prices going up.
So should you like stock prices going up? Depends. Are you a buyer or seller of stock?
If you are 70 years old and you’re selling off your stock portfolio to pay for daily living expenses, then you’re a seller of stock. You like high stock prices.
If you are 30 years old and you plan to accumulate stock for the next 30-40 years, you are a buyer of stock. You should hope for low stock prices right now, and high stock prices in 30-40 years.
“You’re Telling Me I Should Hope For Low Stock Prices?”
I know what you’re thinking: “Did he just tell me I should hope for low stock prices?” You will be better off in the long run if stock prices stay low in the short run. Low prices in the short run allow you to accumulate more shares of stock. If you’re 30 years old, you would do very well to keep buying stock even if prices flatline for the next 20 years.
There is a Catch
My line of reasoning requires that stock prices continue their upward long-term trend. If stock prices historically have risen by 10% per year on average, I am assuming they will continue to average 10% over the next 30 or 40 years.
As long as the long-term 10% trend continues, any weakness in the stock market over the short-term will be counterbalanced by strong returns over the long-term.
Psychology
There is some psychology at play. Even if you maintain a long-term perspective, it would be difficult to continue investing if stock prices continued going down for several years. Likewise, there is a psychological payoff when your stocks go up, even if you aren’t planning to sell them for 30 years.
I suppose you should hope for stock prices to stay relatively low, but yet rise enough to encourage you to continue investing over the short term.
Is that too much to ask?
Conclusion
Just as with gasoline, I buy more stock than I sell. As long as stock prices continue their long-term upward trend, I am more than happy to watch stock prices go down over the short term.
If you’re young and have money to invest, you should too.
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