Business

Reminder: Those big losses are on paper

The shock waves from the worldwide financial crisis hit my oldest son right where it hurts – in his investments account.

“I've lost money,” he said after scanning his September brokerage statement that arrived on an afternoon when the Dow was plummeting.

Lost money?

I thought to myself, he hadn't “lost” anything. How can you have “lost” something that you never really had?

In my son's case, he hadn't sold stock A to buy stock Z. His “loss” was strictly on paper, a plottable price point at a particular time.

The only damage, and this is certainly no small thing, was to his mood. He knew the “loss” was only on paper, but it still hurt to see the numbers. Call it the wealth effect in reverse.

In that same vein, if the stock market had been in an upward trajectory in September, my son would not have “gained” anything other than a nice figure on paper at that point in time and a good feeling about his net worth.

My 23-year-old has plenty of company these days. Millions of distraught investors have been lamenting how much they've “lost” in the stock market over the past month. To rub salt into the wounds, commentators continue to remind us about the trillions of retirement dollars that have vaporized since the market blew up. Geez, if only the stock market had a “restart button” to make all the money reappear.

Understandably, the stock market declines have taken a toll on many families that were preparing to pull out money for college over the next year or two. Same with retirees and others on fixed incomes, who have less time to recoup reverses that cut into their principal. That's real pain.

But for fledgling young investors, it's time for a reality check. This is not the end of the world. They have plenty of time to recover their “losses.” In fact, there could be good opportunities now in the market by following the buy-low, sell-high adage.

The swings in stocks remind me of the ebb and flow of baseball card values a decade ago. Back then, I boasted that my baseball card collection was worth big money. Today, card prices have fallen way off. Yet, I have neither gained nor lost anything because I've not cashed out. The only loss, as economists like to say, was an opportunity for making money.

What can young investors learn from these volatile times in the financial markets, other than that it's always better to own stocks that only go up?

First, don't get wrapped up in the daily mood swings in the stock market. Be patient, follow your risk temperament and invest regularly in good times and bad through a dollar cost-averaging strategy – a beautiful approach that allows you to buy more shares when prices are on the decline.

Michael Stahl, the author of “Early to Rise: A Young Adult's Guide to Saving, Investing and Financial Decisions That Can Shape Your Life,” has long preached the value of investing for the long haul. “Stocks are the best proven creator of wealth of any investment over the long term,” said Stahl, a Leawood, Kan., native. “If you have multiple decades to wait out the emotionally painful ups and downs, history has proven stocks to be your best bet.”

Also important is this notion: There are no guarantees.

It's amazing how many people have yet to learn this lesson. Exhibit A: folks who bit on the housing market and are now up to their necks in debt because they thought home values would always go up. Guaranteed price appreciation on the two-story brick colonial? Markets don't work that way.

Finally, while most of our children won't ever become billionaires, they may be able to think like one if they listen to stock market legend Warren Buffett. In an Oct. 17 commentary in The New York Times, he wrote: “Be fearful when others are greedy, and be greedy when others are fearful.”

Classic Buffett, and the type of thinking young people with a lot of investment years ahead of them need to adopt.

As for my son, all I can add for now is this: Wait until he sees his October brokerage statement.

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