Has anyone noticed the stock market tanking? Of course you have! The reality is, the last trading day of January left us with nothing more than upset. January was literally the worst January we’ve seen in years.
It All Started In Early November
For a while now, markets have been producing incredible gains. Earlier in the year, I started investing personally, and boy did I enjoy gains. However, as I invested, I researched quite a bit about how the market works, and thought to myself, “Now hold on here, something’s not right.” Here’s my basic understanding of how the market works(Don’t want to get too deep into boring details, you might not stick around for that)…
Stocks are based on underlying assets. As the underlying asset increases in value, the stock should follow, and vice versa of course. Value says a lot and tons goes into determining the value of any asset. For instance, anticipation of the new iPhone flying off of the shelves can increase our perceived value of a company. When that iPhone did come out and sales were less than impressive, the value of Apple went down for a multitude of complex reasons. One of those being the inability to move their flagship product. However, no matter what happens in the market, if overzealous investors invest enough to raise the price of a stock beyond the value of its asset, corrections happen and lead to losses. OK, so enough of the boring stuff.
In November, I started noticing that the increases in the values of my stocks didn’t seem natural. It seemed like money was somehow being pumped into them to make them go up unnaturally. So, I wrote a post on PennyPinchinMom.com called “Is There Something Scary Going On In The Stock Market?” asking readers for assistance in figuring out exactly what’s going on. I didn’t get too many comments, but the first one I got was pretty important. The comment explained a process called Quantitative Easing.
I know, I had the same reaction at first. What’s happening in the feds are printing extra money out of thin air. Much of which is going into the stock market. By making people feel like there is more money than there really is, the plan is that people will start spending more. There’s also a bond buying program designed to make everything look peachy keen in the stock market that the Federal Reserve has recently decided to slow down on.
So, What Does All Of This Have To Do With The Market Crash?
Once I learned about the Quantitative Easing process, I started to realize why my stocks were doing so well. And, of course, I started to worry a bit. The simple fact is, the stimulus programs that were and are still going on inflated the price of almost everything. No matter if that be stocks, or a gallon of milk. That’s not all. Increased prices would be OK if the plan worked, but it didn’t!
The plan was essentially to give investors a false sense of hope. The only problem is, no one really bought into it. They told us financial times were getting better, but as consumers, we knew they really weren’t. We could see it all around in our day to day lives. So, we stopped spending. We started saving and preparing for possible financial doom. As a matter of fact, psychologically, the plan really backfired.
The idea was to tell everyone that everything was all better now so that we’d start spending. Our financial lives basically remained the same. Since we didn’t see the change as we were being told that things were getting better, we started to reserve even more. We created plans and started investing. What we didn’t do was start spending. I’m no psychologist, but I think that’s because we were all looking around saying, “If it’s really getting better, I need to be doing something different ‘cause it ain’t getting any better for me.”
What We Should Learn From This
When investing, you’re essentially playing a highly calculated game of Chess. It’s important to not only think about the here and the now, you have to also think about future moves. Now, no one can tell the future, or at least as far as I’ve seen through my own eye’s no one can. However, by looking at market trends and doing a bit of research, you can get pretty damn close. Before making any investment, look at the history of the asset, or company. Think about what that company provides and the demand for those products. More importantly, look at all financial information you can find about the company. Does the price of the stock match what you believe the asset is worth? It’s important to think of all of these things when investing, and not only when our investments are down!
Did the crash catch you off guard?