The DOW has been growing by leaps and bounds lately. This week, it jumped from 25,000 to 26,000 in 8 trading days. While normally, a jump of a thousand in that short of a time period would be a game-changer, it’s not and that holds a dangerous truth.
The higher the DOW is, the easier it is for it to make large jumps.
I recently talked to a friend of mine about this exact situation. We were talking about how much the DOW had jumped and I said I wondered how long it will be until we see a correction. He said, “I don’t know that we’re going to see a correction. It seems like a whole new paradigm in investing.”
I’ve been waiting and also worried about someone saying this to me, because that overly optimistic mindset is exactly what we need to cautious about.
Many of Us Are Falling Into A Trap (Again)
Some of us are pessimistic investors, but be careful not to swing the other way and become an optimistic investor.
The unfortunate fact is that excessively optimistic investors are the norm.
They’re average people, highly educated citizens and even financial experts. Throughout the history of investments there are always people saying we don’t have to worry about a crash because this aggressive bull market is the new normal.
I hate to throw him under the bus here, but it’s the perfect example of how even us experts can fall into the trap of being overly optimistic.
Looking back on it, it’s laughable to see how wrong he was. You can still go through and read the reviews of this book from 2008 as everyone goes through the stock market crash. It’s easy for us to look at that book and those reviews and say that we’d never be like poor Robert Zacaro, but many of us are falling into that trap all over again.
You can also go back and look at financial columns from the 80’s and 90’s, when the market was also doing well. You have financial experts writing articles and telling people they don’t have to be worried about another big drop.
These are professionals saying we will never see the drops we’ve seen in the past ever again, and, of course, we know that didn’t end up being true.
Hey, Optimistic Investors! The Market Has To Correct.
When things are going well, we want to believe they’re going to keep going well. Just like my wife and our kids.
I’ve watched my wife give birth three times and I will never forget all the pain and effort it took for her to bring our kids into this world, but after a couple of years she seems to have forgotten entirely and is ready to have another.
We’re seeing the same problem with these optimistic investors. In the midst of all this growth, year after year, we forget that the market has to correct.
We can’t trick ourselves into thinking this is the new normal. 200% growth is not sustainable.
It isn’t a question of if the market will correct, it’s a question of when.
It may be a slow, steady correction of a few months or years, or it could be a big drop.
It could happen in six months or in six years.
You may be asking yourself now, “Okay, what can I do?”
- Keep a level head. Watch out for the extremes in both directions: the pessimistic and optimistic.
- Enjoy the growth. Keep investing and taking advantage of the great market we have now.
- Put yourself in a position where you’ll be safe if we do face an aggressive correction in the near future. This is essential to your long-term success.
If you don’t know how to prepare for a drop in the market or if you want to make sure you are taking advantage of the investments available to you, feel free to reach out.
I’ll help you figure out if you’re being too aggressive or too cautious and we can figure out a way for you to be successful and make money!