September 30, 2008


Yes, stock prices seemingly dropped off a cliff yesterday. But please remember that, unless you are selling, your losses are only on paper.

In fact, relatively few shares traded hands. Average daily volume on the New York Stock Exchange is 3.6 billion shares. Yesterday, only 1.5 billion shares were sold.

This is basic supply and demand: when there are more sellers than buyers, prices go down. When there are more buyers than sellers, prices go up. Right now, there are few buyers for stocks, so prices are going down.

If you're investing in a 401(k), don't panic, just stick with it. Dollar cost averaging is one of the most efficient ways to invest. Your 401(k) dollars will buy more now than they did last year.

If you're interested in getting into the stock market but don't trust yourself to pick companies that will survive the turmoil and come out ahead in five or ten years—-whatever your investment horizon is--then stick with ETFs and other mutual funds.

As an aside: I find it interesting that, although exchange-tranded funds, or ETFs, and bargain-priced financials dominated the high-volume list in the last few weeks, that changed yesterday. Yesterday, what few buyers were on the floor stayed away from financial stocks. Instead, they took interest in technology, with six of the top ten most-traded stocks being tech firms. Apple, Microsoft and Cisco all traded at higher-than-average volume. So there are some buyers out there. They are just being very picky, and rightly so.

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