What to make of the prospect of soaring inflation, the war in Ukraine, and whatever else is keeping you awake at night... Part 2

What to make of the prospect of soaring inflation, the war in Ukraine, and whatever else is keeping you awake at night...Part 2

Two Short Essays by John H. Robinson, March 5, 2022

Essay #2

How can you be so confident that the stock market will recover and go even higher in a reasonable amount of time?

Do you mean other than the fact that making that bet has been a winning ticket 100% of the time?  In all seriousness, there is a simple reason why betting on a stock market rebound has always paid off, and it never ceases to amaze me how consumers (and many financial advisors) often lose sight of it.  I believe the source of the problem is that the financial news media creates the perception that the stock market is a mysterious, complex, abstract, amorphous entity that can only be tamed through experience and quantitative intellect. Trust me, nothing could be further from the truth. 

The stock market is decidedly not an ephemeral concept, and you don’t need tea leaves or tarot cards or even an algorithm to invest successfully.

When I ask people what makes stock prices go up over time, the answers I receive often include macroeconomic concepts such as interest rates, Fed policy, supply and demand, political machinations, and economic cycles.  Sometimes I get kookier answers that involve charts and graphs and silly terms such as “moving averages” and “Bollinger bands.” Honestly, it’s all nonsense.  All of it.

The reason the stock market goes up over time is the same reason your personal net worth goes up over time.  If you earn more money than you spend each year, your net worth generally grows over time.  The same holds true for the stock market.  If most of the companies that make up the stock market report positive earnings each year, over time their values will rise too.  Far from being abstract and ephemeral, when we peek behind the curtain, we see is that the stock market is nothing more than a large group of real companies that make real products and supply real services.  Most of these companies earn real profits, and many of them are great companies with profits that tend to grow each year.  Some companies profit more when the economy is going well, but many are indifferent to economic conditions.  You probably interact and do business with a number of these companies every day. They are every bit as tangible as your house or car or your refrigerator.  In fact, your car, your fridge, and the materials that built your house were probably all supplied by these very real companies. 

Keeping that perspective is why I never flinch during down markets and why I never worry about the stock market eventually rebounding.  If you understand that you are investing in real companies, keeping that perspective should help you sleep better at night too.

John H. Robinson is the owner/founder of Financial Planning Hawaii , Fee-Only Planning Hawaii, and Paraplanning Hawaii.  He is also a co-founder of fintech software-maker Nest Egg Guru.

DISCLOSURES

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Fee-only financial planning services are provided through Financial Planning Hawaii, Inc. DBA Fee-Only Planning Hawaii, a separate state of Hawaii Registered Investment Advisory firm. Financial Planning Hawaii does not take custody of client assets nor do its advisers take discretionary authority over client accounts.

The information contained herein is general in nature. Neither Financial Planning Hawaii nor J.W. Cole provides client-specific tax or legal advice. All readers should consult with their tax and/or legal advisors for such guidance in advance of making investment or financial planning decisions with tax or legal implications.