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Now more than ever I know people trying to get involved in the stock market to take advantage of opportunities that didn’t exist a matter of months ago. Every day when there is massive volatility in the markets, I get texts and calls from my friends asking what the next move is, little do they know I can’t predict the future (even though I may try sometimes). There are many patterns in the market, and I think some should be capitalized on and some are just an anomaly. In the past week, we have seen all the stocks that were beaten down do well, and all the recession/pandemic stocks attempt to claw at higher levels with trivial success. We cannot predict the market, and the news is changing so rapidly sometimes it is best to just keep a level head and not make a trade at all. This is hard to tell my listeners because we all love action and making moves that can improve our life. But, from my experience, sometimes the best action is no action and here is why.
Depending on what type of trader you are impacts the message of this blog. From a long-term perspective, it is always best to invest and dollar cost average into the market. From a short-term perspective, best of luck. With volatility that is impacted based on scientific findings, I think it is best to not make a trade at all. When an announcement is made in the left field, while you are trading short term and you didn’t get the news in time you can get burned. It all falls into risk/reward, and I think the waters are ripe right now if you want to be risky, but this article is intended for those who carry a low, semi moderate, moderate risk tolerance. You can see a 20-40% swing in a matter of days, and if you need access to that capital in the near term these short term plays should not be made. Just as we see very aggressive swings down, the bounce back up is likely to occur as quickly.
Note from a Bankrate Article, if you have your 6 months fully-funded emergency fund, you are doing better than 71% of U.S. citizens.
I’ve been hearing the craziest things people have been doing to free up cash to invest in the market, and they are doing this because they think we have hit the bottom and this is a missed opportunity if not capitalized on. For cash, people have been taking out personal loans, home equity lines of credit or even in some cases using cash advances on a credit card to invest. If you must go through any of these measures to attain capital, you shouldn’t be investing in the first place unless you know exactly what you are doing. Although likely, most of these people don’t know what they are doing because they haven’t built a sum of wealth from the market, to begin with, hence their minimal net worth and need for a loan.
I will never forget this lesson in which sometimes the best trade is being no trade, and I learned it a few years ago from Timothy Sykes the famous day trader known for his large capitalization's in a matter of hours. The lesson holds the test of time, and I think it is something more of us should consider when we are sitting on a pile of cash trying to capitalize on these fantasy-like market swings. Dave Ramsey famously says, give every dollar a name, and this name is a structured plan. Not businesses in which one is not familiar through inexperience or having the need to fulfill romantic investment desires. The headlines are bright, the percentage gains keep one in awe, the fear of missing out is incredible now. It is easy to look and see what we should have done, the opportunities that we missed cost us a fortune. Often, these lost opportunities torment us. We all need to remember that hindsight is crystal clear, and to take lessons from all that we are going through while keeping a level headed and diversified investment plan in the coming months.