By November 26, 2007 Leave a comment Read More →

You Lose More Money When Stocks Go Down

You can lose more money when stocks go down than you can make when they go up. In It’s Never Too Late to Get Rich: The Nine Secrets to Building a Nest Egg at Any Age, Jim Jorgenson and Rich Jorgenson write about the downside of a buy-and-hold approach using an example.

A Comparison of Buy-and-Hold and Trend Investing
Jim and Rich write the following:

“An investor who invested a dollar sixty years ago and stayed in the market at all times could have a portfolio worth about $17,000 today. But if he was out of the market for just the 20 best months in the sixty years, months when the stock market was doing very well, his investment might be worth only $240.

What you are not told as a buy-and-hold investor is that if an investor was out of the market for just the twenty worst months when stocks were falling like a rock, his investment might be worth only $240.

What you are not told as a buy-and-hold investor is that if an investor was out of the market for just the twenty worst months when stocks were falling like a rock, his investment might be worth $1,700,000. Another Wall Street saying to remember is:

Investors can lose more money when stocks go down than they can mak when they go up.

Because the average investor can lose more money when stocks go down than they can make when they go up, a buy-and-hold strategy may not be the best way to invest during proloned bear markets, which have occured over the past few years. In fact, a period of falling stock and mutual fund prices can reduce a buy-and-hold investor’s annual returns over five years to less than those of a taxable money-market fund, and in many cases to an annual loss. As a result, individually managed accounts have become one of the fastest growing ways to invest. “

Key Take Aways
I’ve seen this first hand. When I joined Microsoft, a mentor told me there was a key difference between the well-off and the not-so-well-off. The well-off held on to their options when they invested. The not-so-well-off, cashed their options and lived beyond their means. I took this to mean that, as a rule, you should hold on forever. I later learned, that holding on forever is not the right strategy. You can in fact, lose more when the stocks go down than you make when they go up.

Posted in: Book Nuggets, Finance

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