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Health & Fitness

The Market Playground

The recent volatility in the markets shows how crazy a "playground" they can be.

Let me preface this by saying that I am basing this post on nothing more than what I can logically determine through my own observations so take it for what it’s worth.

The swings in the market that we have seen lately are....well crazy. Not just the daily swings either. The hourly swings are absurd. Markets were never meant to swing in this manner. It wasn't that many years ago where you had to wait until the next day's paper to see what the market did the day before. Now we can all see it live. I am writing this as the Dow finishes up 430 points for the "best" day in almost 2 years. Less than 3 hours ago the Fed spoke and the Dow plummeted from around +200 to over -200. Now, it’s finishing at +430! Yesterday was one of the worst days of all time. These swings are not signs of logical or rational thinking. Instead it’s the result of dirt cheap trading costs, instantaneous information and day traders.

It's important to understand the difference between traders and investors. Traders are trying to make money now. Investors are trying to grow their money at a decent rate so they can achieve financial goals (i.e. retirement). The problem, however, is that we are all playing in the same playground.

The traders are running around the playground like a kid who just ate 20 candy bars while investors are sipping apple juice from a Sippy cup and enjoying the swing. It soon becomes a playground in chaos. What inevitably happens next? The calm kid on the swing sees crazy sugar kid having fun so he joins in. At the first sign of trouble and an adult coming to reprimand him, the sugar kid settles down and hides under the slide. The calm kid gets busted jumping from the top of the monkey bars.  As soon as the parent turns her back, the sugar kid starts going nuts again. Calm kid is too scared after being reprimanded to join in on the fun. He decides to wait until it’s safer. This playground is the market we live in on a daily basis and why it’s important to look at your investments from a longer term perspective.

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The market was founded as a way for companies to raise capital in hopes of using the capital to grow. Investors chose their investments based on the perception of how the company would perform. Oftentimes, day traders rarely look at companies’ financials nor do they care how the company does in six months. Instead they are legally gambling on what the stock price will do in the near term. There are now computer programs that are allowed to place millions of trades a day. I doubt it is researching these trades.

Since it seems most regulation congress tries to pass does nothing to address these problems, what do you and other investors do? First, don’t fall into the trap of making moves based on daily market swings. Instead have a long term strategy (5+ years) that matches your risk level and make changes based on longer trends rather than daily data and emotions.

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This post originally appeared here.

Matthew B. Brock, CFP®
Senior Partner, Owner
Divergent Planning, LLC

Securities and Investment Advisory Services Offered through H. Beck, Inc., Member FINRA,SIPC.H. Beck Inc. and Divergent Planning are not affiliated.

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