The recession of 2008 is unlikely anything we’ve seen in close to thirty years. There’s been over a 30% drop in the stock market in the last year, the national debt is reaching new record highs, and the federal government is acting in new and innovative ways to combat the recent negative economic events our nation’s economy has seen. The market can easily fluctuate by several percentage points over the course of the week and it’s hard to determine where it’s going next.
Many people in the last few months have chosen to stop investing in the market because they were afraid of losing any more money. They switched over to more liquid investments that have fewer fluctuations such as certificates of deposit and money market accounts, but is this the right move to make?
Everyone knows that the right thing to do is ‘buy low’ and ‘sell high’, unfortunately most people are very bad judges of when the market has hit the bottom and when the market has peaked. Instead people tend to see other people making money, so they buy into the stock market after it’s already seen most of its gain, then panic and sell whenever they see their investment go down in value, not a winning game plan.
In the last year, the market has pulled back significantly from its all-time highs, so essentially most investments are ‘on sale’. You can buy a share of any given company for less than you would have been able to about a year ago, but if you want to sell it now, you will also be selling it on sale and getting less money for it.
Remember, you haven’t really lost any money until you sell your investment and over the last 70 years, the stock market has averaged an 11.7% rate of return. If you’re investing for retirement, the stock market is the place to be. There might be some fluctuations in the short term, but over the long haul, you’re going to end up making a lot of money, a lot more than if you denigrated yourself to only investing in certificates of deposit or money market funds.
Although American capitalism is strong as ever and will be fine over the long haul, what do things look like in the short term? Most economists are predicting some sort of recovery in the second half of 2009 with that continuing in 2010. The market might not regain 100% of its value in the next year and a half, but for now, the stock market has stabilized for the time being, and many are predicting an upward trend.