Stock market movements: A crucial factor to investment decisions or not?
Some days stock market goes up and some days stock market comes down. Some days it closes on green and some days it closes on red. Should all these stock market movements play a crucial role for an individual investor in making his investment decisions?
I have some money to invest.
If I see that market is coming down, then I have two choices to make. Either I can decide to invest today or not to invest. IF I HAVE INVESTED TODAY and the market go up tomorrow, then I will be happy because I have bought it at lower rate. Suppose if the market comes down further, then I will feel bad because if I could have delayed my investment by a day, then I could have bought it at much lower rate. IF I HAVE NOT INVESTED TODAY and the market goes up tomorrow, then I will be worried because I missed an opportunity to buy it at a lower rate. Suppose if the market comes down further, then I will be happy because I can buy it at a still lower rate.
Similarly, if I see the markets are going up, I can invest or postpone. If I invest and market comes down next day, if I postpone and the market goes up the next day……?
The point I am trying to make here is by simply watching today’s market movement and making an investment decision will not help. One needs to forecast the movement of the next day. Not only next day, the next to next day, the next week, the next month and so on. Also by watching the market movements to make investment decision, we allow our emotions –fear and greed- to creep in. When emotions come into play, the possibility of making a wrong decision is more.
So what should we do? Divide and rule. Predicting the market is not possible. The market is out of our control and we can’t do anything about it. It is worthwhile to focus our efforts and energy on the things we can do something about. But what is in our control is the money which we are going to invest. We can do something here. We can choose to invest the money in a staggered manner.
What would be the correct practice? Studying only during exams or studying regularly? Exercising only when we become overweight or exercising regularly? Investing only when the market comes down or investing regularly? I need not tell you the answer because you all know it. By investing regularly our investment will be spread across the ups and downs of the market. Our investment cost will be averaged out. We will not become emotional and we will become a more disciplined investor in this process.