By Zach Scheidt
This post You Should Be Glad The Market Flash Crashed… appeared first on Daily Reckoning.
1,597.08
That’s how far the Dow Jones Industrial Average fell on Monday before rebounding a bit into the close.
Investors freaked out — even the professionals!
Just for a little comedic relief, I flipped on CNBC in my office to see how the talking heads were handling the crisis. And true to form, most of them were yelling questions at each other with very few answers for investors.
Yes, the Dow’s drop was surprising and unsettling. Yes, it was hard to pinpoint an actual reason for the decline. Yes, the “flash crash” has introduced a lot more uncertainty into the market.
But despite what you may think, this is actually good news for you and your investments.
Today, I want to talk a bit about how the flash crash and the new stock market can actually help you grow your wealth more effectively…
A Market of Stocks vs. a “Stock Market”
People are blaming the sharp decline in the market on several things:
Higher wages leading to inflation fears
The FBI memo release, adding political uncertainty
Computer trading triggering massive sell orders
The start of Jerome Powell’s term as Fed Chairman
The Patriots losing the Super Bowl (I’m not kidding!)
Some of those reasons make a bit of sense. Some of them are laughable. But the bottom line is that the market sold off because of a number of factors. Yet the underlying strength of the U.S. economy is still very much intact. And that’s good news for investors.
Instead, one of the hidden reasons the market briefly crashed this week ties back to a lazy shortcut most investors have been taking.
For years, people have been told that “passive investing” is the best way to grow your wealth. Passive investing simply means that you invest your money into the “stock market” by buying an index fund. That fund typically uses your money to buy the biggest stocks in the market, naturally driving “the market” higher.
Passive investors give no thought to which companies are actually growing profits and which companies have good business models. Instead, their money is blindly plowed into the most popular stocks, driving them higher and higher.
This is a terrible environment for smart investors, because all of these passive investors are simply overinflating the prices of popular stocks and neglecting the stocks of good, solid companies that fly under the radar.
Then these passive investors helped make Monday’s flash crash even worse.
The biggest and most popular stocks fell as panicked investors tried to get out of the market and computer programs naturally sold the easiest stocks to trade.
Following the flash crash, you can bet that people will be less comfortable with “the market” as a whole and more interested in picking out specific stocks.
I love this shift in the market.
Because going forward, people are going to be paying a lot more attention to the merits of individual stocks, instead of investing blindly in “the market.” And that creates a lot of opportunity for those of us …read more
Source:: Daily Reckoning feed
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