THE current financial crisis has seen people dreadfully fearful of the stock market. Investors, now more than ever, are so afraid of touching the stock market that they have either sold all the stocks they own or simply stopped looking at the prices of their stocks.
People have seen the value of their equities drop in half and many say they'll never touch the markets again.
But they're doing exactly the wrong thing. As an investor, one's objective in the stock market is to "buy low and sell high". However, most people act contrary to that.
When the markets are bustling, more and more people start taking to it. Looking back to the technology boom of the late 1990s, the higher prices got, the more people wanted to buy. You see your neighbour earn 100 per cent returns with a particular stock and you can't bear to "miss out" on the opportunity of a lifetime.
Euphoria sets the stage for irrational buying. In two months, your stocks go up 50 per cent, and you're delighted.
Then all of a sudden, the bubble bursts. The market plunges, and the stock is now at 30 per cent below the price you paid. You think you better be smart and "cut your losses". So you sell all your stocks and feel relieved that you're now "safe". But effectively, you've just bought high and sold low.
Most average investors do not have the appropriate technical knowledge to constantly beat the market through timing. Because of that, one must be able to invest for the long-term.
Short-term speculation is a sure way to make consistent losses. This means, you should only invest money you do not need for the next couple of years. You never know precisely when the market is going to crash, so you need some sort of holding power.
In addition, you need to be level-headed. One must have the wisdom to avoid the market frenzy and curtail buying during irrational market highs.
Similarly, one has to have the guts to invest at market bottoms. There is no point trying to guess exactly where each peak or trough is, so don't bother.
The only thing that you know now is that the markets are irrationally low and a lot of stocks are going at bargain prices. So that means only one thing: It's time to buy. Eventually, the market will rebound and you will make your profits. It's not time to be fearful. Its time to be greedy.