Why a Stock Market Rally Isn’t Always A Good Sign

Did we hit a fork in the road yesterday? Which direction should a smart Wealth Pilgrim take? Is the stock market rally signaling good times ahead?

The market rallied about 7% yesterday. We’re still 9% underwater since the start of the year but up 20% over the last two weeks. This kind of volatility is simply devastating to the investor who is looking for short-term security. Where do you go? What do you do?

The only thing you can do is not get too excited either way. Easier said than done…I know.

Don’t get me wrong. I’m delighted that the market did so well yesterday. But it’s important not to let the events of one day (good or bad) influence your investment strategy. Am I throwing cold water on your party? I hope so.

As I’ve written about before, since the uptick rule was suspended in July of ’07, market volatility has exploded. As I’m sure you’ve noticed, it’s really quite impossible to get a bead on where the market is over the short-run. This has made it even more important to focus on your long-term strategy.

This may seem boring, but now more than ever it’s important to ignore financial headlines (unless they appear on Wealth Pilgrim) and short-term swings in the market. So the reason I ask you not to get too excited about the market when it’s great is because I don’t want you to get too excited when the market isn’t so great. Could the market continue this beautiful trajectory? Sure. Will it be a straight shot up from here? Not likely. Is it possible that the market could re-test its lows? Absolutely.

Think back to the analogy of a traveler on a journey. Our ultimate destination is to climb that mountain over there. We’ve just come up to a hill and it blocks our view of the mountaintop. Should we create a new map (use a new strategy) or plod on? The best solution for you is to adopt the appropriate investment method and use investment strategies that work. Never rely on your “gut feeling” or react to what you may see or hear. It’ll cost you big-time over the long run.