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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.
Top tool for best market results is patience
WHAT EXPLAINS Tuesday’s massive stock market rally? Was it an oversold market? Did the Federal Reserve calm matters down by promising liquidity?
Plenty of people will offer an opinion on what explains it, but the fact is nobody really knows all the forces that drive markets up and down in the short term. Stocks have outperformed most investments over time, but it’s anybody’s guess when rallies will occur.
That’s why the easiest approach to investing for most people is just to buy and hold quality companies, mutual funds or index funds.
People who tried to time the current market might have missed out on the Dow Jones Industrial Average’s 416-point rally Tuesday. That was the biggest one-day gain since 2002.
An article in the March edition of the Edward Jones’ newsletter, "Investment Perspective," shows just how costly it is to miss the kind of big rally seen Tuesday.
A person who put $10,000 into the Standard & Poor’s 500 on Dec. 31, 1997, and did nothing else would have had about $17,600 at the end of 2007, the newsletter states. That 5.8 percent annual return includes dividends but not fees or commissions.
Had the investor missed the 10 best stock-market days during that decade, her annual return would have dropped to 1 percent a year. And an investor who missed the 40 best days would find himself with just $4,160 at the end of the 10 years, a 58 percent loss.
Of course you’d have to be extremely unlucky to have picked those exact 40 best market days to miss. Nonetheless, the point is clear: Dancing in and out of the market can be detrimental to your investing health.
Anybody who has played fantasy baseball has probably already learned this lesson. Over the course of a long baseball season, the cream generally rises to the top. But that doesn’t mean that your topnotch player won’t suffer slumps along the way. In fact it’s highly likely he will.
Some fantasy owners get fed up with their player’s persistent slump and put him on the bench. That’s typically the week that he goes off for about six homers and 20 runs batted in.
For investors and fantasy owners, the lesson is clear: Patience is a virtue. History has shown that over time the returns will be solid. It’s just unknown how much of a roller-coaster ride it’ll take to get there.