I didn’t think much about the stock market until I graduated college. At age 20, I was recruited by a large insurance company to sit for my state life and health insurance license, as well as my series 7 and 66 securities licenses. After passing these exams, my job was focused more on selling annuities than watching the stock market.
I quit less than three months after passing those exams. I then worked a string of odd jobs including a long-term stint as a substitute algebra teacher at a local high school.
I didn’t think much about the stock market until a temp agency asked me to write a sample research report for a financial publishing company. I don’t remember the specifics of the assignment except that it had to be about a dividend-paying stock. I wrote about Caterpillar (CAT), and 10 years later I’m still hooked on dividends. (I wouldn’t recommend CAT today because its dividend isn’t worth our time).
My first gig in the financial publishing industry was being mentored by the editor of a newsletter very similar to Yield Shark. I was tasked with building the charts needed for the letters and writing weekly portfolio updates. So there I was, week after week, reading company news and trying to figure out what it would do to the share price.
It didn’t take long for me to notice something very strange.
A lot of the time, the stock price would move for no reason.
I wanted a reason behind a stock move to give to my readers. I’d look at company news, industry news, and macroeconomic news. Sometimes there was no logical explanation.
The experience taught me one of the most important things I’ve ever learned about the stock market.
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The No. 1 Thing I Wish I Knew as a Beginner Investor
Companies really don’t have anything to do with their share prices. Sure, a company press release can act as a catalyst, but most of a stock’s price movement is a result of investor sentiment.
It’s all about how they feel about the company, the industry, and the market in general. People can be logical, but not all the time… I would say not even the majority of the time.
As a new investor, it was easy for me to get caught up in the direction my stocks and the market were moving. When shares started to drop, I panicked and the sell button became my best friend. When markets started to roar, I got excited and would add shares to my portfolio at prices that defied logic. The result was I overpaid for some stocks… and panic-sold others. Both of these emotional reactions caused me to lose money that I didn’t need to.
Buying high and selling low. This is the exact opposite of what we need to do to make money. Once I knew this (and you do, too), I made a plan and stuck to it.
When markets drop, I buy more of my favorite stocks. Of course, I always check to see that nothing has changed with the company and that it’s just investor sentiment pushing around the stock price. Remember, when price goes down, yield goes up. Buying on price dips can help boost my average yield on a stock.
When markets rip higher, I look for stocks that I want to get rid of and redeploy the money in a more promising company. I generally hold my positions for many years. The downside is that also means my portfolio can get quite large.
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Any stop-loss order instructs your broker to sell a stock at a specific price. If your stock continues to move higher, nothing happens. Only when the stock drops to your sell price will it be sold. Instead of setting a fixed price, I like trailing stops. As the share price moves up, your broker will adjust the trigger price to the percentage above the new high.
Once we understand that investor sentiment drives the market, and we lay out a plan, it no longer becomes a problem, but instead a powerful tool.
Where Are We Headed Through the End of The Year?
Analysts use different gauges of investor sentiment. Some even have their own proprietary models.
For a long time, I used the CBOE Volatility Index, or VIX. This index measures the expected market volatility over the next 30 days. I still watch the VIX, but now I mostly use the CNN Fear & Greed Index.
The index uses data from seven different indicators (the VIX is one of them), and I consider it a pretty fair gauge of market sentiment. I also like the timeline on the right that compares today’s reading with those over the past year.
The index was in greed territory as of yesterday morning, climbing two points higher than Monday. Just one month ago, the index sat in extreme fear.
Investor sentiment can move from one extreme to the other very quickly.
Last Friday marked three straight weeks of S&P 500 gains. The gain for last week was a measly 0.1%, but an impressive 9% for the full period. We’re less than 100 points away from a new 52-week high. So, as you set yourself up for 2024, use this rally to get rid of stocks you don’t want to carry into the new year. Be sure to use limit orders as you’re adding to any positions to prevent overpaying, and stick to your plan. Do you use limit orders when you buy? How about trailing stops when you sell? Drop me a note at firstname.lastname@example.org and let me know how you’re protecting your trades against investor sentiment.
For more income, now and in the future,