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Sunday, August 22, 2010

Worth Thinking About


One of the reasons do-it-yourself investors should "buy the market" when investing is the importance of being invested in those companies that do the best over the long term.
Suppose the market is comprised of 10 stocks. We might expect that 2 will do really well, 2 will be duds, and the rest will achieve market performance.

What about the 2 duds? Let's assume they are really bad and go to zero - think Fannie and/or Freddie. What about the 2 that do really well? They are likely to go up 3 or 4 times (or much more, especially over the long run) their purchase price - think Apple or Price Line.

So the most you can lose in the duds is 100%, but the upside is unlimited for the winners.
To prevent misunderstanding, I am advocating buying the market. The 10-stocks example is for illustrative purposes only. Buying 10 stocks can be highly detrimental to your financial health!

6 comments:

  1. Buying the market guarantees that you participate in the growth of the US economy + dividends + inflation. The returns might not set the world on fire, but if history repeats itself you're looking at 8 - 12% average yearly returns over a 30 year or longer period.

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  2. This seems like a very solid strategy. Like you mention in the post, I do not invest in individual stock. However, I do "buy the market" so to speak. I guess it like saying "long-term" will the overall top businesses in our country be doing better over the long-term.

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  3. re: Grouch and Shawn To me there is no question that for most individual investors buying the market and taking the long terp view is the way to go. Buying just doesn't mean picking good ones it means missing spectacular ones - and that can be costly.

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  4. Buy the market indeed, although I think this strategy and owning consistent dividend-payers is a hybrid strategy many DIY investors should consider. Consistent dividend-payers aren't duds. You get the best of both worlds...

    Thoughts?

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  5. Conversely, shorting the market can mean potentially unlimited losses ;)

    I agree with buying the market, but if you are willing to take the time to do the research, or if you personally know someone who does and you trust them, then I think that specializing is OK, too. Just don't pay a mutual fund manager to do it... cause that usually doesn't pay! ;)

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  6. re: Financial Cents I think like every sector of the market dividend payers have their day. Some bloggers seem to think they always outperform and it just isn't true. Also I think it is worth asking why they can't find something to do with the money that will benefit stockholders more than returning it to them. Still, today's market, where yield is scarce, makes good dividend paying stocks attractive.
    re:Invest It Wisely Hey, if you've got the know how, resources, and time - go for it!

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