As a young investor, I have frequently heard about the stock market going up or down in the news and from friends and family that invest. But what does that mean, really? What does it mean for the market to be up or down on any given day? How good or how bad can it get? More importantly, what should I do about it as a young investor? What seems like an unstable environment has contributed to my feeling hesitant about investing.
Stocks for the Week Founder Kevin Stewart has some answers:
GB: What does it mean when the stock market gets “clobbered”?
KS: The market is based on expectations; it is always looking forward to where we could go and projecting on where it thinks we will go. General market conditions, such as an overall bullish (growing) or bearish (slowing or declining) market, can be caused because investors are either feeling more confident or less confident in the ability for stock prices to grow in the market. At the end of January the S&P 500, which is the stock trading floor for the Fortune 500 companies, was down 3% for several days. This type of “clobbering” could be caused by world events, bad numbers, or newly released information. It’s in times of a “clobbering” that the safety score on the MPI website that becomes even more important. This will really help you pay attention to long-term investing in times of low markets.
GB: You mentioned that “newly released information” impact the markets. Who should I be reading and paying attention to project the stock market movements?
KS: The Federal Reserve Bank (the Fed) is always a safe bet. Whenever the Fed makes a statement they are setting course and policy. The Fed’s open market policy committee meets once per month and can then release additional information. Additionally, once a month, on the first Friday of every month, the Department of Labor, Bureau of Labor Statistics releases the employment numbers. There are several other resource options, such as quarterly earnings reports, but the Fed and the Department of Labor are great sources information regarding market fluctuations.
GB: What is a common mistake investors make when the market goes up or down?
KS: The most common mistake investors make is that they overreact to the information they hear, rather than having a long-term perspective. By the time the information gets to the public, what might have started as a well-intentioned good idea and a positive increase for the market might have already passed. On the other hand, the market will always go up and down in the short run.
At MPI we believe it is very important to continue to have a long-term perspective so you can better assess the long-term growth of the market and the stocks. A part of this long-term approach is a keen understanding of your own risk preferences.
If you are sitting at the $100 blackjack table you will probably only be able to sit there for a short period of time without worrying about your bottom line. But, if you are playing at the $5 blackjack table you will be able to play for a longer period of time because you will be able to embrace the longer-term risk. The key point is finding a place where you are comfortable to play for the long-term. With that being said, at some point it is important to increase your investments when the stock market is high and our members can use our “Buy, Hold, Sell” feature to determine a good time for each of these actions. You can also use our graphs to monitor the green and red dots in the same fashion. For the sell section, you can also create your own personal cut-off point per stock. For example, if your cut off point is 10% down, then if a stock fell 11% in price it might be beyond your risk level and it might be time to sell that stock and re-invest in another option.
GB: You just made an excellent point about the use of the Buy, Hold, and Sell features of MPI. What other ways could I use MPI to monitor the market?
KS: As I mentioned before, I would first and foremost recommend the use of the safety score feature. The higher the safety score, the safer the investment. In the long-term you are looking for safety scores above 50.
You should also be monitoring the sector-specific safety scores. The sector safety scores will help you diversify your portfolio and help you find safe industries and companies within each given sector. For example, the Basic Materials sector has several favorable industries within it and these industries, such as oil & gas or steel & iron, would help educate an MPI user about stocks and key news for the given industry.
Most importantly, use our application and our emails to help guide your individual pick. The pick on the upper left corner of the web application is our top recommendation for the day. For a more advanced investor, you can begin to use our Undervalued Stocks section. These companies may require some additional research, but the MPI-official algorithm has highlighted that they will be worth the time.