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Authors: Andrew Hallam
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market over the period of January 1, 1982, to December 31, 2005, as an example.
During this time, the stock market averaged returns of 10.6 percent annually.
But if you didnât have money in the stock market during the best 10 trading days, your average return would have dropped to 8.1 percent annually. If you missed the best 50 trading days, your average return would have been just 1.8 percent annually. 5 Markets can move so unpredictably, and so quickly. If you take money out of the stock market for a day, a week, a month, or a year, you could miss the best trading days of the decade. Youâll never see them coming. They just happen. More importantly, as I said before, neither you nor your broker are going to be able to predict them.
Legendary investor and self-made billionaire Kenneth Fisher, who has his own column in Forbes magazine, had this to say about market timing:
Never forget how fast a market moves. Your annual return can come from just a few big moves. Do you know which days those will be? I sure donât and Iâve been managing money for a third of a century. 6
The easiest way to build a responsible, diversified investment account is with stock and bond index funds. Iâll discuss bond indexes in Chapter 5, but for now, just recognize them as instruments that generally create stability in a portfolio. Many people view them as boring because they donât produce the same kind of long-term returns that stocks do. But they donât fall like stocks are apt to do either. Theyâre the steadier, slower, and more dependable part of an investment portfolio. A responsible portfolio has a certain percentage allocated to the stock market and a certain percentage allocated to the bond market, with an increasing emphasis on bonds as the investor ages.
But when stocks start racing upward and everyoneâs getting giddy on the profits theyâre making, most people ignore their bonds (if they own any at all) and they buy more stocks. Many financial advisers fall prey to the same weakness. But those ignoring their planned allocations between stocks and bonds set themselves up for disaster.
How can you ensure that youâre never a victim? Itâs far easier than you might think. If you understand exactly what stocks areâand what you can expect from themâyouâll fortify your odds of success.
On Stocks . . . What You Really Should Have Learned in School
The stock market is a collection of businesses. It isnât just a squiggly bunch of lines on a chart or quotes in the newspaper. When you own shares in a stock market index fund, you own something thatâs as real as the land youâre standing on. You become an indirect owner of all kinds of industries and businesses via the companies you own within your index: land, buildings, brand names, machinery, transportation systems, and products, to name a few. Just understanding this key concept can give you a huge advantage as an investor.
Business earnings and stock price growth are two separate things, but long term, they tend to reflect the same result. For example, if a business grew its profits by 1,000 percent over a 30-year period, we could expect the stock price of that business to appreciate similarly over the same period.
Itâs the same for a stock market index. If the average company within an index grew by 1,000 percent over 30 years (thatâs 8.32 percent annually) we could expect the stock market index to perform similarly. Long term, stock markets predictably reflect the fortunes of the businesses within them. But over shorter periods, the stock market can be as irrational as a crazy dog on a leash. And itâs the crazy dogâs movements that canâif we let themâlure us closer to poverty than to wealth.
True stock market experts understand dogs on leashes
I used to have a dog named Sue who behaved like we were feeding her rocket fuel instead of dog food. If you turned your back on
During this time, the stock market averaged returns of 10.6 percent annually.
But if you didnât have money in the stock market during the best 10 trading days, your average return would have dropped to 8.1 percent annually. If you missed the best 50 trading days, your average return would have been just 1.8 percent annually. 5 Markets can move so unpredictably, and so quickly. If you take money out of the stock market for a day, a week, a month, or a year, you could miss the best trading days of the decade. Youâll never see them coming. They just happen. More importantly, as I said before, neither you nor your broker are going to be able to predict them.
Legendary investor and self-made billionaire Kenneth Fisher, who has his own column in Forbes magazine, had this to say about market timing:
Never forget how fast a market moves. Your annual return can come from just a few big moves. Do you know which days those will be? I sure donât and Iâve been managing money for a third of a century. 6
The easiest way to build a responsible, diversified investment account is with stock and bond index funds. Iâll discuss bond indexes in Chapter 5, but for now, just recognize them as instruments that generally create stability in a portfolio. Many people view them as boring because they donât produce the same kind of long-term returns that stocks do. But they donât fall like stocks are apt to do either. Theyâre the steadier, slower, and more dependable part of an investment portfolio. A responsible portfolio has a certain percentage allocated to the stock market and a certain percentage allocated to the bond market, with an increasing emphasis on bonds as the investor ages.
But when stocks start racing upward and everyoneâs getting giddy on the profits theyâre making, most people ignore their bonds (if they own any at all) and they buy more stocks. Many financial advisers fall prey to the same weakness. But those ignoring their planned allocations between stocks and bonds set themselves up for disaster.
How can you ensure that youâre never a victim? Itâs far easier than you might think. If you understand exactly what stocks areâand what you can expect from themâyouâll fortify your odds of success.
On Stocks . . . What You Really Should Have Learned in School
The stock market is a collection of businesses. It isnât just a squiggly bunch of lines on a chart or quotes in the newspaper. When you own shares in a stock market index fund, you own something thatâs as real as the land youâre standing on. You become an indirect owner of all kinds of industries and businesses via the companies you own within your index: land, buildings, brand names, machinery, transportation systems, and products, to name a few. Just understanding this key concept can give you a huge advantage as an investor.
Business earnings and stock price growth are two separate things, but long term, they tend to reflect the same result. For example, if a business grew its profits by 1,000 percent over a 30-year period, we could expect the stock price of that business to appreciate similarly over the same period.
Itâs the same for a stock market index. If the average company within an index grew by 1,000 percent over 30 years (thatâs 8.32 percent annually) we could expect the stock market index to perform similarly. Long term, stock markets predictably reflect the fortunes of the businesses within them. But over shorter periods, the stock market can be as irrational as a crazy dog on a leash. And itâs the crazy dogâs movements that canâif we let themâlure us closer to poverty than to wealth.
True stock market experts understand dogs on leashes
I used to have a dog named Sue who behaved like we were feeding her rocket fuel instead of dog food. If you turned your back on
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