to see part I click here-
http://www.gurufocus.com/news.php?id=109157A real story of a stockbroker and an old orphan:
There is an old orphan who is entirely reliant on her social security, and pension to live. She has a few hundred thousand dollars, which she tries not to use as living expenses and is meant to be passed down to her children in grandchildren. She relied entirely on her stock broker for advice. The stock broker recommended she buy Citigroup and General Motors. Anyone who follows the market at all knows how that ended. Citigroup went down over 90%, and General Motors declared bankruptcy leaving the shareholders with pittance. The orphan was lucky enough not to put as much money into these stocks as the broker had recommended. However, she still listened to her stock broker thinking this was an innocent mistake. She showed me her statements in 2009 and she had 70% of her portfolio in stocks. This is an appropriate allocation for a much younger individual, but far less appropriate for an elderly orphan. Furthermore, many of the stocks were more risky and speculative, instead of bull chip stocks with strong balance sheets, and high dividend yields which would be more appropriate for her. Point in case- do not listen to your stock broker.
Lesson #2 Do Not Try to time The Market
This is one of the biggest mistakes investors make. Part A. The worst time to invest is when the economy is booming and the stock market is reaching record highs. The best time to invest is when the economy is in the dumps and the stock market is falling like a knife. Many people were investing in the stock market in the 1999, and 2000 when the Tech bubble was booming. Everything that ended with .com went up in price, regardless of the financial condition of the company. The result? A 50% drop in the stock market. Flash forward to late 2008 and early 2009. The economy looked awful, people were losing their homes, job losses almost reached $1 million per month. There was serious talk of another depression. All the news was doom and gloom. If you bought in March at the height of pessimism, you would have had a return of about 70%. There are many more historical examples of this. However, the most recent ones are mentioned here since these are probably the most fresh in readers memories.
Why is this the case? I will explain what drives the stock market.
http://www.valuewalk.com/
http://www.gurufocus.com/news.php?id=109157A real story of a stockbroker and an old orphan:
There is an old orphan who is entirely reliant on her social security, and pension to live. She has a few hundred thousand dollars, which she tries not to use as living expenses and is meant to be passed down to her children in grandchildren. She relied entirely on her stock broker for advice. The stock broker recommended she buy Citigroup and General Motors. Anyone who follows the market at all knows how that ended. Citigroup went down over 90%, and General Motors declared bankruptcy leaving the shareholders with pittance. The orphan was lucky enough not to put as much money into these stocks as the broker had recommended. However, she still listened to her stock broker thinking this was an innocent mistake. She showed me her statements in 2009 and she had 70% of her portfolio in stocks. This is an appropriate allocation for a much younger individual, but far less appropriate for an elderly orphan. Furthermore, many of the stocks were more risky and speculative, instead of bull chip stocks with strong balance sheets, and high dividend yields which would be more appropriate for her. Point in case- do not listen to your stock broker.
Lesson #2 Do Not Try to time The Market
This is one of the biggest mistakes investors make. Part A. The worst time to invest is when the economy is booming and the stock market is reaching record highs. The best time to invest is when the economy is in the dumps and the stock market is falling like a knife. Many people were investing in the stock market in the 1999, and 2000 when the Tech bubble was booming. Everything that ended with .com went up in price, regardless of the financial condition of the company. The result? A 50% drop in the stock market. Flash forward to late 2008 and early 2009. The economy looked awful, people were losing their homes, job losses almost reached $1 million per month. There was serious talk of another depression. All the news was doom and gloom. If you bought in March at the height of pessimism, you would have had a return of about 70%. There are many more historical examples of this. However, the most recent ones are mentioned here since these are probably the most fresh in readers memories.
Why is this the case? I will explain what drives the stock market.
- Corporate profit growth. This is the amount of profit the company increases every year. The average growth has been around 6% (citation). This has largely been the case both during Democratic and Republican administrations.
- Dividend yield. The average dividend yield since data was kept on file is a bit above 4%. So on average the stock market should return about 10% a year.
- Change in the Price earnings ratio. What does this mean? It is basically a metric that determines how much your are paying for the earnings of companies. For example you might hear on the radio that the Dow Jones is at 10,000 and the P/E of the Dow jones is 10. That means for every dollar of earnings in the index, you are paying a multiple of ten.
http://www.valuewalk.com/
