Tuesday, March 13, 2007

Jobs and Stock Market Corrections

We had months of steady Stock Market increases without any corrections. When this goes on too long (as it did in the 90's) people tend to exude "irrational exuberance" and make foolish decisions about buying. (This applied to the 90's stock market as well at the 00's housing market - everyone was buying on the "greater fool" theory and did not make an assessment of underlying value).

But is this market correction a real indication that we should panic? The underlying economy still looks strong. GDP may slow down from the 3.5% - 4.0% growth rates it has experienced the last 5 years, but a recession does not look likely. Companies are still hiring. Overall unemployment is near a record low of 4.5%. And look at these unemployment rates by education:
Less than High School education - 7.1%
High School diploma - 4.3%
some college education 3.9%
College Bachelors - 1.9%

So when there is a market correction, and the economy looks good (or not) what should you do?
  • not panic - in fact, if you are using dollar cost averaging to invest just keep putting the same amount into savings
  • stay in an index fund - if the economy is going to tank, individual stocks are the most risky. Stay in a index fund that represents the market.
  • diversify out of stocks. Yes, I know that stocks market investing is passive and you don't have to do much. But starting a small business is the best way to diversify. And this is where most of the job creation is coming from - not Fortune 500 companies.

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