The stock market has been in the news a lot lately. Meteoric gains have been followed by drastic losses, sometimes within the same day. The stock market is always somewhat cyclical, but those cycles have been especially significant over the last few years.
There are countless things that can cause the stock market to rise and fall. In recent years, some of the most common factors have been COVID-19, high international and domestic political tensions, and ongoing inflation. In all likelihood, most of these factors are going to stick around for the foreseeable future.
So why do we keep investing in the stock market? Is it worth dealing with all the stress of watching your investments grow and shrink in a volatile market?
At Guiding Wealth, we believe the answer is yes. Because the truth of the stock market is this: even though it rises and falls, it does go up in the long run.
Understanding How Current Events Affect the Stock Market
While the stock market has always been subject to ups and downs, it seems like it’s been especially volatile recently. In fact, most major news publications dedicated entire stories to the stock market’s dramatic day in late January.
On January 24th, the Dow Jones dropped 1,115 points but ended up closing the day slightly higher than it opened. The S&P had a wild ride as well; it showcased the largest intraday comeback since 2008.
Tumultuous market behavior can be extremely frightening to watch as an investor. It’s easy to miss the real point of those news stories: The market corrected itself. The stock market doesn’t always right itself within a day, but it doesn’t usually take long.
The market will probably continue to be volatile due to factors like inflation and foreign tensions. But with a solid investment plan, you can ride out the drops and enjoy the benefits of the rises.
Building Sustainable Wealth Through the Stock Market
There are two basic ways to build sustainable wealth: start your own business or invest in other people’s businesses. If you’re an entrepreneur with a lot of drive and passion, it’s possible to start a profitable business as the basis of your wealth. This is a very concentrated approach to building wealth, and while it can be extremely successful, it’s not realistic for everyone.
The second way to build wealth is to invest in those successful businesses that other people are creating. The stock market makes this type of investment easy and accessible. One of the reasons this country is so wealthy is that the stock market allows the average person to invest in multiple successful companies.
When you purchase a company’s stock, you become an owner of a small part of that company. When it succeeds, you get to share in that wealth through your stock. You don’t need to take on the risks of being an entrepreneur or try to come up with the next billion-dollar idea. You can invest in the stock market and build wealth that way.
Weathering Stock Market Dips
We’re in a period of significant market volatility right now. We see drops as high as 10% fairly regularly. And those days are scary for investors. It doesn’t feel good to watch the value of your investments drop like that.
But it’s really all about perspective. Yes, the market is volatile in the short term, but it goes up over time. On average, the market is down one out of every four years, but it’s up three out of those four years. So overall, there’s more time when the market is up than when it’s down. The key is to structure your investments based on this long-term market behavior.
What does this look like? The details will be slightly different for each individual, which is why it’s so important to work with an experienced financial planner. But in general, the idea is to use your stock investments for slow-and-steady wealth gains. Take advantage of compound growth by reinvesting your gains to continue growing the value of your investments. This is how millionaires are made!
You need to have other finances for your everyday expenses. A balanced investment portfolio gives you access to funds for your standard purchases and investments that grow over time.
Financial Planning Takes the Stress Out of the Stock Market
The stock market can be an excellent investment opportunity, especially if you approach it with long-term goals and a plan to handle market downturns. Good financial planning can keep your investments secure even during a recession.
Want to learn more? Access our free guide to Retirement in a Recession.
At Guiding Wealth, we know that watching the stock market rise and fall can be frightening, especially if you have a lot of wealth tied up in stocks. Our financial planners can help you build a solid investment portfolio designed to take advantage of high stock prices while also weathering dips in the market. Call us at 214-810-3835 to get started, or use our online calendar to schedule a consultation.