Trading Tips No 2: The Big Lie in the Stock Market
It is commonly reported that the stock market averages about 10% per year return over the long term (decades). So the investor that buys and holds a diversified portfolio of stocks or mutual funds is led to believe that their portfolio will grow by 10% per year on average. You know the mantra, “Not to worry, I’m a long term investor. On average, I’m earning 10% per year.”
There is only one problem here. The facts, as you will see in a moment, state otherwise.
Let’s assume for a moment that an investor could match the stock market average return of 10% per year (not likely, by the way, as most professionals fall short of this goal). Further assume the market averages 10% per year over a four year period:
| Year | Ac Size | YR Return | Av Return | Av Return |
| 0 | $100,000 | |||
| 1 | $ 80,000 | -20% | -20% | -20% |
| 2 | $ 72,000 | -10% | -15% | -14% |
| 3 | $ 93,000 | +30% | 0% | -2% |
| 4 | $131,040 | +40% | 10% | +7% |
From the above example, you can see that our investor who managed to match the stock market performance year by year finished with an average portfolio return of only 7%, not 10%. Underperforming the stock market averages will always be the case, no matter what market period is selected - past, present, or future. So, can you expect to average 10% a year in a diversified portfolio of stocks and mutual funds (that you buy and hold) in a market that averages 10% per year? The answer is clearly, “No!”
This is one reason for considering alternative investments for a portion of your portfolio, such as a good trading system that provides superior returns in non-correlated markets.
-=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-
If you would like to learn about the stock market and
you have a computer and a burning desire to seize
success, then you have what it takes to personally
unearth Bill’s Astonishing, step by step trading secrets
…BUT ONLY FOR A LIMITED TIME.
http://www.instantprofitstoday.org.
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exitingMore Stocks & Mutual Funds Information:
Related Articles
Hot Stock Trader: How to Pick Momentum Stocks with Ease and Simplicity
Most stock traders know that momentum trading can be a very profitable activity. You can make big amounts of cash in a short period of time.
8 Penny Stocks to Avoid
There are many good penny stock investments available, which could turn a small amount of capital into a small fortune very quickly. However, to discover these you need to know what to look for and what to avoid.
Expense Ratios
Mutual funds and brokers are always preaching not to buy any fund with a high expense ratio. That is the annual costs of the fund to pay for trading of stocks within their portfolio, salaries, rent, telephone, analysts, etc.
What To Buy Now
I am sure that if you have a brokerage account with a "full service" broker you have been getting calls about what to buy and sell. If you have big losses in certain stocks you might be hit with that great Wall Street lie to buy more so you can 'Dollar Cost Average'.
Choosing An Investment Stock Broker
If you want one.And I don't recommend any broker with whom to trade who will be giving you advice on what to buy and sell.
It Cant Be Done
Wouldn't it be nice if you were only in the stock market when it was going up and have everything transferred to cash while it is going down? It is called 'market timing' and your broker or financial planner will tell you "it can't be done". What that person just told you is he doesn't know how to do it.
Mutual Fund Expense Lies
When purchasing mutual funds we are cautioned to read the prospectus, look at past performance, check out the fund manager's record and see what their expense ratios have been.We are also told that we should not buy funds with expenses exceeding 1% to 1.
Acapulco - The Stock Market Dives
There is a famous cliff on the ocean in Acapulco where experienced divers jump into the sea. It is very dangerous because the water at the base of the cliff surges from a depth of 2 feet to 12 feet.
Stock Market Diversification
In one of my previous articles (Investing in the stock market -9 powerful tips), tip number one was:1. Do not spread your money too thin.
Buying New Issues
Has your broker been calling you recently with the "great opportunity" to get in on a new Initial Public Offering? With friends like that you don't need any enemies.I don't care how good this new stock offering sounds.
Choosing a Stock Broker
If you were to find that you had some severe illness that required surgery, would you attempt to perform that surgery upon yourself? What if your car broke down and needed a valve job? Would you get out the Craftsman tool set you got for Christmas three years ago and start tinkering under the hood even though you know absolutely nothing about engines? Of course you wouldn't do either of these things because there are times in life when we know we must seek the assistance of a professional. So why is it that so many people try to make their own investment decisions without consulting a professional stock broker?A stock broker is a trained financial professional who knows how to watch the trends of the stock market, is kept up to date on financial developments by her brokerage firm, and knows how to make wise and sound investment decisions.
Lights of the Stock Market
There are red lights, green lights, blue lights and spot lights. There are orange lights, pink light and flash lights.
Stock Trading - Daddy, Why Arent We Rich?
One Saturday morning, while he was sitting at his computer studying the market, David's 7 year old daughter came up, tugged at his shirt sleeve, and said, "Daddy, why aren't we rich?" He looked his child in the eye, and thought to himself, what a great question - Why aren't we rich?As she stood there expectantly waiting for an answer, he struggled to come to terms with the realization that, although he had focused his complete attention on trying to create wealth for more than 10 years, he had never actually made any real headway.He had bought and sold many Stocks and several properties over those years, but had never made any real money.
Low Expense Ratio
One of the big advertising kicks today from mutual funds is to tell how low their expense ratio is and that you will make a great deal more money if you buy and hold with them. Partly true, but that is not the whole story.
Analyst Reports
When you become interested in a stock or mutual fund you can call your broker and he will send you reports on how the company is doing, what their management is like and what might be the projected earnings for the company and how the industry is doing. Great information.
A Penny for Your Stocks
According to Investopedia Inc. the penny stock market has seen phenomenal growth this past decade.
How to Maximize Your 401k Mutual Fund Returns
When it comes to 401k's there is an overabundance of sad stories. Here is one that at least has a happy ending-and it's getting happier all the time.
Different Ways of Buying Stocks
Let's say you are interested in this one company. You read its annual report, like what you see and your calculation indicates that the stock is trading way below its fair value.
Discipline
One of the great "secrets" of successful people is discipline and it doesn't make any difference whether it is manufacturing, processing, servicing or investing in the stock market.Before you can have that discipline you must have a successful plan and stick with it.
Buy Low - Sell High
Now where have I heard that before? I know. It was my broker.