We can almost smell the fear in the market. But what exactly are investors afraid of? Can they really be concerned that the global economy is improving? What’s wrong with that? It is a good thing, isn’t it?
Shouldn’t we be rejoicing that the world is slowly recovering from the dreadful pandemic. I am. I can’t wait for life to return to normal. So, what exactly is the market so petrified about?
Warren Buffett could provide a clue to the market’s reaction when he said: “When the tide goes out, we will find out who has been swimming naked”.
Sure enough, we will soon discover who has been skinny-dipping in the stock market.
These could include traders who have ridden the momentum in the market in the hope of riding from the crest of one wave to another. It can be quite exhilarating in a rising market.
But share price momentum can turn on a sixpence. It relies on increasingly more people piling into the market to sustain the forward impetus. If that should dry up, then the momentum could evaporate, too.
Thing to remember is that stock market returns, or the money we could make from shares, are driven by two components, namely, share price gains and reinvested dividends.
Dividends are the more reliable of the two. That is not to say that the payouts are guaranteed. Nothing is ever guaranteed. But a portfolio of well-chosen income shares should be able to deliver a consistent stream of income.
Share prices, on the other hand, can be volatile, especially if they have been driven up by irrational exuberance. Trouble with exuberance is that it can fly in the face of traditional investing….
…. it doesn’t always discriminate between good and bad companies. Instead, it believes that what is going up must be good, not because it really is good, but because its share price is rising.
Consequently, those who have bought shares without understanding why they have bought them could be in a for a shock if markets should fall.
Thing is, these events happen regularly in the market. So, don’t panic unless you own shares without knowing why you bought them in the first place.
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David owns does not own shares in any of the companies mentioned.