Nobody likes losses and – if we’re totally honest – we’re all afraid of losing money. Losses in the stock market are a daily occurrence because stock prices fluctuate. And they fluctuate more and more.
The author Thomas Meyer, whom I am interviewing about his personal experiences with investing in our fifth episode, therefore rightfully asks why these fluctuations are so big.
Indeed, the fluctuations are bigger than they should be for rational-economic reasons. At least, this is what Robert Shiller proved and what earned him the Nobel Prize.
We can only speculate about the reasons. One likely problem is the human mind, but there are other mechanisms in play as well. I can personally think of three reasons.
Big fluctuations can be caused by computers that trigger buying and selling orders automatically. In addition, the fact that people can react to events a lot more quickly than before is causing faster course changes in the stock market. Back in the day, you had to make a phone call and reach the trader before an order was executed. He then had to personally contact the other party to process the transaction. Today, you can do the whole thing from your mobile phone, and the only thing between your finger and the completed order are a few electrodes that move through the wires at light speed. No wonder that things happen more quickly, and no wonder that the fluctuations are bigger.
Another contributing factor is that the trade fees have decreased significantly. The lower the trade fees, the more people buy and sell stocks. This also leads to higher fluctuations.
Finally, you shouldn’t forget that interest rates are very low, which also affects fluctuations in the market. If interest rates go from 10% to 11%, then this is only a 10% increase. If they go from 1% to 2%, then the increase is 100%. If interest rates grow from 10% to 11%, the prices of securities will drop by 10%. If they grow from 1% to 2%, prices are dropping by 50%. If interest rates are very low, even tiny changes can have big effects.
The fluctuations aren’t really a problem for Thomas Meyer because he has a long-term savings strategy. How you can acquire this perspective will be the topic of next week’s blog.