It’s never a good thing to watch stock market fluctuations like a hawk, but you are in good company this year. With coronavirus causing so much suffering and affecting so many major industries in a big way, the Federal Reserves worldwide doing what they can to combat the economic shocks, and a highly contested and competitive presidential election, there are many reasons for people to be worried about their portfolio.
I too have caught myself peaking at stock prices way too many times this year. And while we usually talk about how downtrends can negatively affecting our mood, an uptrend can affect us greatly as well. After all, watching your portfolio value zoom upwards can brighten our day quite a bit too.
The stock market has seen nothing but up, up, and up for the past two weeks, and I find myself feeling just a bit more relaxed these days after a pretty scary few months of volatility. Do you feel happier when stocks go up too? I mean, of course you do. Who wouldn’t? But is a bull market really something to be smiling about? Here are some reasons why you should temper your excitement when stocks go up because it may not be that great for you financially.
1. High stock prices mean your deposits will buy fewer shares if you are still in the accumulation phase. Most of us are still working and need to keep buying into the stock market for a few more decades before we retire. Let’s say you are able to save $100 a week to put into your investment portfolio. When the index fund you buy is worth $10, you get to buy 10 shares. But if it goes up 10%, you can only buy roughly 9 shares because each share now costs $11.
That can’t be a good thing long term!
2. Home prices are probably up when the stock market is up too. Stock market values are increasingly tied to what the Fed does with rates. When the Fed lowers rates, mortgage rates tend to go down, and that in turn pushes home prices up. Nowadays, stock prices go up whenever Fed lowers rates too because more people have been buying stocks on borrowed money and a lower Fed rate means more capacity to borrow for companies and individuals alike. This has made home values more and more correlated with stock prices.
High home prices make people happy as well, but high home prices only benefit those who have multiple homes. People who are renting will need a higher down payment to get into their first home when home prices are high, and people who own a home won’t benefit because they still need a place to stay. If they want to move up the property ladder by buying a nicer home, they will have a harder time too because the bigger home is going to be more expensive.
Bidding wars are also more common in a hot property market. This just makes the whole buying process that much more frustrating. One of my friends in recent years lost out on 12 bidding wars before she was able to buy her first home. In the end, she paid more than she originally set out to and she accepted flaws in her home that she initially would consider deal-breakers. High home prices aren’t all that’s cracked up to be.
3. This false happiness has another effect. High home and stock prices make everybody spend more. I mean, why worry about the costs of a few more appetizers when your home value just went up by tens of thousands of dollars and your portfolio has done the same?
Even those who are really good at being frugal are affected. When everyone around you spends more, you tend to spend more too. If you go out with friends and they suggest a higher-end venue, wouldn’t you end up spending more too?
4. A bull market can tempt you to gamble with individual stocks. I had dinner with a friend the other day and he was asking for investment advice after a few drinks. He truly believes that a company like Visa will never see their stock price go down that much. Now, if there’s any company in the world that seems to have a solid grip on our way of life, it would be the biggest credit card network in the world. Still, saying that the company will never see its stock price dive is a big stretch.
Innovation rules our world. You just never know what will happen in the long term. Plenty of people get lucky with individual stocks, but no one can’t predict the future.
5. It can even tempt you to start borrowing money to invest in stocks. Think twice before you borrow money to invest. Volatility can wipe out years and years of savings and gains if you borrow money to invest. Meet Margin Jerry and read his story.
6. Stock market values being really high magnifies the moves in the next crash. That’s because high stock prices attract more buyers looking for a quick buck, and other buyers to borrow more money. When stocks go the other way and margin calls start happening, you can bet that everyone who’s not in it for the long term is running for the exits. The more people running for the exit, the worst the declines get, and that in turn causes more people to run because of margin calls. Do you notice that market moves are getting more and more extreme? That’s because there are more and more borrowed money being invested.
In March, I remember waiting two hours on the phone just to get to the banker because their whole department was swamped with calls to other borrowers who needed to be notified that their portfolio will be liquidated if they don’t add funds to their margin account.
Remember how you feel in March when markets were making 9% moves daily? I don’t know about you but I’d rather see less of that.
7. Bull markets can be demotivating for some because it gives you a false sense of financial security. I’m 40 years old, but a few of my friends are already retired. Another friend told me recently that he’s trying to work less. Markets are at an all-time high, and some who’ve diligently saved are seeing their fat portfolios and extrapolating those good returns to keep going forever. Do you still remember everybody disputing those long term 10% annual return claims during the financial crisis? You hardly hear anybody questioning those claims anymore. It’s all affected by the emotions of what’s currently happening.
Just as you shouldn’t be too pessimistic during bear markets, you shouldn’t be too optimistic during bull markets.
As I like to say, things aren’t as bad as you think they are, but it’s also not as good as you think they are.
Look. Bull markets can be fun to witness if you are invested in the stock market. All I ask is that you don’t get too excited because it’ll go down someday too. After all, stock prices will go up and down and up and down and up again. Don’t get too excited when prices are high, and you won’t get as disappointed when prices are low.
Play the long game.
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Yes sir, Housing prices have increased and it may be good for some. But they can fall just as fast. I’m guessing that is going too be very soon. Just wait and see.
Housing prices are high, but you really never know if it’ll crash, keep going higher, or stay the same for years. I wish I have the crystal ball though!
People around me are all trying to buy their first home. I know that prices are moving up across the nation, but affordability is way down because of the low rates. We don’t invest in the stock market but we are certainly happy that home prices are going up. It won’t affect me financially like you said since I still need a place to stay, but it definitely beats housing prices crashing, don’t you think?
You may be surprised that not every first-time homebuyer benefits from low rates that much. There’s a post coming next week about it. Stay tuned!
I like that quote of yours “things are not as good as you think they are and things aren’t as bad as you think they are either.”
Words to live by.
Sure is!
I want to stop looking but I can’t stop. It’s addicting to see my money grow. Help!
Don’t think about not looking, but just do something else and you won’t remember to look!