With the market in such a volatile state, many people are asking the question: ‘Is the Stock Market going to crash?’ And more importantly, ‘Should I sell out now’? Let’s look at how the stock market actually moves up and down, and get some perspective. After that, we can look at where the Market is today, and decide what to do.
The Stock Market drops
The Stock Market always falls. That’s a simple fact. What goes up, must come down. We learn this truth at an early age. Think back to when we’re trying to take our first steps as toddlers (or if you have kids, think of them taking their first steps). We first build up the courage to let go of whatever we’re holding onto, move our leg in a walking-like motion, then whoops, we miscalculate the placement of our foot, and land flat on our butts. But we eventually build up our courage to get back up, and try again. Next time we maybe get a few more steps before falling back down. The cycle repeats. We get up, we fall down. This is our first lesson in gravity, and it’s one we never forget.
This is also true of the stock market, except for one major aspect; As long as the economy continues to have growth, the gravity of the market is the exact opposite of the real world.
This means:
The Natural Gravity of the Stock Market is Up, Not Down.
In other words, for the stock market the saying should be; ‘What goes down, must come up’! This is an important concept to wrap your head around. Here’s how it works…
The Stock Market will keep moving up, until a force that is strong enough to counter the upward gravity, pulls it back down. That force can any number of things; from one big event, to many small events, or anything in between. The point is, there has to be some existing force substantial enough to fight the natural upward pull of the stock market gravity to prevent it from going higher.
The Stock Market is a Balloon on a String
Take a second and picture the market as if it’s a helium filled balloon connected to a long spool of string. It naturally wants to float upward, and so it continues to pull and lengthen that string, moving higher and higher. This continues until something comes along to grab the string and start to pull it back down, fighting against its tendency to rise.
The way this actually occurs is based on the ratio of buyers and sellers in the stock market. The buyers help the balloon float higher with every purchase, letting out a bit more string with each share they buy. The sellers on the other hand, pull the string back in with every share they sell, bringing the balloon lower with each sale made. Therefore, If there are more buyers than there are sellers in the stock market (or in an individual stock), then the balloon floats higher. In this case, there are more people letting out string then there are pulling it back in.
The opposite is true in a falling market. Their are now more sellers pulling in the string than their are buyers letting it out, and so the balloon is pulled down. The ratio of buyers to sellers determines the speed at which the balloon rises and falls.
If the majority of people are buying, than the string will be let out much quicker than it will be pulled in, allowing the stock market to move higher at a rapid pace. However, if the opposite is true and there's an overwhelming number of sellers in the market, you’ll see that balloon being pulled down very quickly, causing the balloon to drop rapidly.
Sometimes this battle goes back and forth for a while; The sellers grab on, pull the balloon down a bit, and then slip off and it moves back up as the buyers get control again, only to be pulled down once more when the sellers grab back on. This is when you get a sideways market.
Fun Fact: This is Stock Market trend is called a Channel, or a channelling market. It occurs when neither force is strong enough to break it out of a sideways moving trend. It’s characterised by peaks and valleys that remain within the constraints of the channel. Picture a tunnel, with a floor and a ceiling; the balloon will move from the floor and then back to the ceiling, bounce off and head back down to the floor, until enough force causes it to either break through that ceiling, or fall through that floor, changing the trend of the market.
Inevitably, the balloon will always start to move back up in the direction of its natural pull. It’s much easier to let out a little string than it is to pull against that rising balloon. After all, it takes more effort to fight the gravity of the market, and in the end, it’s always a losing battle.
Markets Past Performance
Still not convinced? If we look at the movement of that balloon over the last 100+ years, we find out that the balloon (the stock market) rose by an average of 8% per. In other words, the market gravity always wins in the long run. That may not sound like a large number, but when we look at it as a total percentage increase, we see that the balloon rose by a very healthy 219,876% over that 100 year period.
Now that’s a lot of string…
Over those last 100 years, we saw the market move up ever higher, making higher highs, and higher lows as the years went on. There were many peaks and valleys along the way, some much deeper than others, but still the balloon continued it’s rise. It survived two World Wars, the great depression, the Dot Com Bubble of the 2000, the Great Recession of 2008, and you can bet your bottom dollar that it will survive the next big crash, whatever the cause may be.
After all, can anything ever really win the fight against gravity?
The Catch
The problem here is probably obvious for some of you, but likely not as obvious for the rest. What if you don’t have 10 years or more to wait for your account to recover? Yes, the stock market always recovers and moves higher, but what if you’re close to retirement right now, and quite literally can’t wait for your life savings to recover from an overall market crash?
If this is your situation you have to be a lot more certain of when and how you invest your money, and more importantly, when you shouldn’t invest in the market. To learn more about how to do that, we must move onto the next step; Learning to Value the Stock Market.
Now that you understand how the market tends to work, you can learn how to understand when large forces start to pull on that string, signaling that we’re close to a market crash. We can then decide whether we want to get out before the sellers start to really win the fight, or hold on hoping the market will move up to an even more overvalued territory.
Conclusion
Yes, the market will fall. It always has and always will, (on average every 8-10 years) it has for the last 100+ years, sometimes not recovering for long stretches of time. But, (and it’s a big but here,) the market always moves higher in the long run. In other words, as long as you have enough time left to wait for the market to recover and move even higher from the crashes, you can ignore them. You can simply keep saving and investing in low fee index funds as often as you can over your lifetime. Just be sure to do the math and make sure your yearly contributions and a likely return of 8% is enough for the retirement you want to have.
Because the truth is, for most of us, (including me), that’s just not going to be enough. Instead we must put in the necessary time and effort to learn how to invest ourselves. And with that, we’ll learn when it’s time to enter, and when it’s time to exit the market. I’ve learned a few key ways to do this from my mentor, and I’ll teach you all of them.
Until then,
Happy Investing.
~Ryan Chudyk~
PS.
If you haven’t already done so, be sure to sign-up to my newsletter. I’ll send you weekly investing lessons delivered right to your inbox. As a gift, when you sign-up I’ll also give you My Investing Checklist. Sign-up now
.
Leave a Reply
Get in the Conversation, Share your opinion.