Falling prices are good, unless you are an imminent seller

When the stock market is tanking, like it has been recently, I find many people are scared to talk to me about it. They seem to think that declining stock prices are like a death in the family–a reason to offer condolences.

But, why is that? I don’t fret if I go to the grocery store and find prices have fallen 20%. When I go to buy gas, I’m quite happy to find prices have fallen. Why is this so different with stock prices?

After all, I’m a net buyer of investments. Only if I had some imminent plan to sell my stocks because I needed the money very soon would falling prices be a bad thing.

I think most people think I’m putting on a brave face or bucking myself up when I say I’m happy to see stock prices falling. They can’t seem to conceive that falling prices are good for buyers of stocks just as it is good for buyers of groceries, gas, cars or even houses.

I think that is because people too closely associate themselves with their current net worth. Instead of conceiving of their net worth as something in flux, that goes up and down like everything in the economy, they feel their current net worth indicates how much they can pull over time.

But, current net worth is a snapshot, not life itself. Just as a picture cannot capture a life, neither can current net worth define your lifetime cash flow.

Even for those close to or in retirement, stock market fluctuations need not be of major concern. If you have money you need to spend next month or next year in the stock market, you are indeed at risk. But you need not bear that risk unless you choose to. Your cash needs for the next three or so years should be in a stable value position, like a bank or money market account, not in the stock market. 

Most people who fret over stock market returns don’t need that money soon, either. They know they will need it in time, but they don’t need it today. 

Market volatility and declines are a benefit to the calm investor who knows that current net worth is just a snapshot. Thought of in this way, stock market drops can lead to higher net worth over time and increased cash flows. That is why I’m happy to see the stock market decline, and I think others should be, too.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Advertisements
Falling prices are good, unless you are an imminent seller