Markets go Up and Markets go Down

Although this may seem incredibly obvious, many people say that markets always go up. I remember during the real estate bubble that popped in 2008, agents were saying,

Real estate always goes up.

It’s pretty obvious now that is a lie. But it works for them. The clueless would-be investors that believed them bought up properties like there is no tomorrow. And for them, there wasn’t much of a tomorrow. Most of the properties went into foreclosure and were repurchased by more savvy investors.

Shanghai Composite Index

Shanghai Composite Index 2011 – 2016

It is clear from looking at this chart that the Shanghai market was in a bubble. But for most people it is only obvious in retrospect. Markets have been bubbling and busting since they were first invented thousands of years ago.

Now that most markets have recovered completely from their 2008 lows, it seems that we may be on the verge of the real collapse. As I mentioned in a recent post about the possible impending Financial Crisis, many people think that 2008 was just a small preview of the financial chaos that will soon engulf the world.

In fact, market crashes often have a short-lived steep selloff right before the crash. I think this is part of the group psychology of a market crash. During the 2008 crash, many people did not sell. They waited until the markets were down so low that it was too painful for them to sell.

But this time it’s different. The pain of the 2008 crash is fresh in everyone’s mind. And, there are tens of millions of retirees in the US alone that are going to be quick to pull their money out of the stock market as it declines. They were nearly wiped out a few short years ago, and they will be sure to not get wiped out this time.

Can anyone predict with certainty what will happen in the markets in the future? Absolutely not. But individual investors can get educated and learn basic concepts like “Markets go up and markets go down.”