Stock Market Roller Coaster

I see a number of posts online where people are very uncertain or even uneasy about investing in the stock market. Others (and some of those same posts) show that many people don’t know much about the stock market or investing in general. One recent post I saw asked the question, “Why should I invest in my 401k at work? Isn’t it safer to put it in a savings account?” This post, I think, is a great illustration of the lack of knowledge and fear that exists when we talk about the stock market.

To be clear, I’m not calling any of these people stupid. Lack of knowledge doesn’t mean stupidity; it simply means lack of knowledge. Most of us have never been taught anything about investing. We may have picked up a bit here and a bit there from our friends or family. Sometimes, that information isn’t even correct. Unless we go out and intentionally seek knowledge about investing, it will always be a mystery to us, and that mysterious nature will lead to fear and uncertainty. This is amplified since most of us remember the recession of 2008 and the money many people lost during that time.

One issue is a basic misunderstanding of how the stock market works. People see and hear stock prices on the news or on their phones. When those stock prices drop, they think they are losing money. You don’t lose money just because the price drops in the stock market. You only lose money if you sell it at that point. When you invest your money in stocks, whether a single stock or a mutual fund full of stocks, you are buying a certain number of shares at a given price. You essentially then own those shares. As the price of that stock goes up, the value of those shares increases. The reverse is also true; as the price of that stock goes down, the value of those shares goes down. But you haven’t gained or lost any money until you sell those shares. That is the key to understand about investing.

The stock market is inherently volatile, especially if you look at it over a short period of time. But over the long-term, the U.S. stock market has grown steadily. Even after times of economic downturn, like the Great Depression or the Great Recession of 2008, the market recovers. If you didn’t sell your shares during the downturn, prices recover and go on to gain further.

If you are doing day trading, these fluctuations in the stock market are a big deal. They are how you make (or lose money). Investing for retirement, though, is a long-term game. We’re not worried about the day-to-day fluctuations in the stock market. As long as it’s not time to retire, we shouldn’t even worry about the recessions that hit the market every so often. The market will recover and go on to be even stronger. A basic knowledge of investing and of how the stock market works can help us sit back and calmly ride the stock market roller coaster.