The Sky is Falling …. Why Markets Continue to Fall, after Bailout Passes

Economics, The Economic Beat

Well, the news isn’t getting any better, is it?   We hear that the Asian markets have lost 7%, that the German market is off 10%, and around the globe, it seems as if the news isn’t any better.

The problem is, in a word, “Chicken Little”.  Before the bailout received all the publicity, before the news media started screaming that the sky (or in this case, the Stock Market) was falling, there was some semblance of sanity in the market.  Companies that were being beat down went down, because they were being beat down. Now, we’ve got media talking heads telling people to “Get Out Before It’s Too Late!”, which of course, is causing the panic.  

Now, the markets are falling on every piece of news, because it’s all about the emotions, all about the media stirring up sensationalism.

To be honest, I’ve been warning you that economic hard times are coming.  I haven’t, however told you to stock up like Y2K, or to get out of the market.

The real losers in this situation are the people who have panicked and sold out their market positions, because, until you sell, you really haven’t lost anything.  You may have lost “value” on paper, but until you cash out, it’s only a notional loss.  

If you do not have to take your money out of the stock / mutual funds market right now, don’t! And for God’s sake, don’t start pulling funds out of your 401K in a panic, because after losses, and IRS penalties, you will wind up with about ten cents on the dollar.

Just sit tight, live a little leaner, don’t go further into debt, and if you have some available money, now is a great time to income average your way to profit.  Buy into a mutual fund that’s fallen in value (ONLY with money you can afford to lose) and if it keeps falling, keep buying.  Each time you buy at a lower price, you are driving your average cost per share down.  If you buy 1 share at $5, and 1 share at $4, then your average cost per share is $4.50.  If it falls to $3/share, and you buy another share, your average cost per share is now $4.00.  

The reason to do this is to average your way down towards the bottom price. Then as the prices rise, your profit point happens sooner. For example, say a stock falls from $100 a share to $50 a share, and you bought at 10 shares at $70 and 10 shares at $60, then your average cost per share is $65, and every penny the stock rises over $65, is a penny of profit.  So if the stock returns to $100, you’ve made $35/share. 

And remember, no matter what the economy is doing, someone, somewhere is still making money off of it.

2 Responses

  1. adrianna  •  October 13, 2008 @7:38 am

    My dad wrote this.
    And its easy enough a 7 year old can understand it.

  2. [...] Today is Blog Action Day, a day when bloggers take time out from whatever their normal subjects are, to focus a spotlight on attention on issues that matter.  This years subject of Poverty is entirely appropriate, considering the fact that the US economy, and the World economy, seem to be spinning out of control. [...]

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