When Newton developed his concept of gravity, he was talking about tangible things—like apples. But the idea that everything that goes up must come down can also be applied to the stock market.
The price of stocks and other tradable investments are based on consumer interpretation of their current value and future potential. The market doesn’t move on its own. It’s simply a display of the overall reactions of investors over a period of time. When investors are buying more than selling, the market will rise. When they are selling more than buying, the market will fall.
Behind this movement is either fear or confidence. When investors are fearful, they often sell. When investors are confident, they tend to buy. There can be many factors behind their fear or confidence, including news, rumors, and financial reports.
When the market goes up, the price of many stocks rises. Plenty of individual stock prices can fall while the general market is rising. At this point, it becomes more expensive to buy stocks that have risen and you can sell the shares you own for more money, assuming they have risen as well. Just because the market’s rising however, doesn’t mean you will sell your stocks for more than you purchased them. Your individual price paid, or cost basis, determines the amount at which you need to sell to profit.
When the market goes down, it means the price of stocks is slipping. Of course, not every stock will fall—some stocks might actually rise in price while the general market is falling. Buying stocks at this point can often assure cheaper prices and allow you to profit once the market goes back up, assuming the price of the stocks you bought go back up too. If you have to sell stocks when their price is down, it means you have to sell more shares that you would when the price is up. For example, if XYZ is selling for $10 a share, then you only need to sell 10 shares to get $100. But if their price falls to $5, then it will be 20 shares to get $100.
You can’t predict when the market will be up and when it will be down—but it’s a relatively safe assumption that at some point during your retirement, it will hit both ends of the spectrum. To protect your postretirement income, it’s best to keep that portion of your savings you’re relying on for income insulated from market losses through protected products such as fixed indexed annuities.
In the next issue of the THREATS TO POSTRETIREMENT INCOME series, we look at the second threat you must face; Interest Rate Fluctuations.