Grocery shopping may be easier than investing. An empty pantry dictates that now is a good time to buy more food, but how can you know when is a good time to buy stocks? Most people tend to make their investment decisions based on historical performance. But imagine if you always traded that way. You would see the market run up and then buy. However, buying stocks when the price is high is not necessarily the best investment move. While the law of supply and demand helps set stock prices, the best way to profit from stocks is to buy them before they become popular … and expensive.
Historical information is all that I have
You might reasonably argue that the only information that you know for sure is what happened in the past. Other than that data, on what else could you base your investment decisions? Unfortunately, that’s where the concept of risk comes into play. No one can tell you for sure what will happen tomorrow, which is why every financial investment carries some level of risk. A client recently requested that I contact her before the next market crash so she could sell. I had to explain that I lack the ancient skills of prophecy.
So why should I buy stocks?
Since you can’t use history as a solid indicator of future results, the best reason to invest in stocks is because you believe that in the future, the economic situation will improve. The top reason to buy stocks is hope for future growth. If you have faith in economic growth, buy!
If you believe that people will continue to require the goods and services of a company, consider purchasing its stock. If you have hope for a growing economy, invest in the sectors you believe will grow even stronger. But, if you walk around saying how bad the economy is, how awful the leadership is, and how hopeless the future appears to be, then don’t invest a penny in stocks.
If you have a glimmer of hope that the future will be better than today, and if you want to learn more about how the stock market works, watch a short clip on stocks.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published July 12, 2012. Updated March 2019