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Thursday, 19 July 2007

Another Investment Myth Exposed

by Graham Dyer

"Stocks always rise in the long term.Don't try and time the market; what you need is time IN the market! Just buy and hold."

You have no doubt had the experience of being urged like this by your stockbroker or someone else with a vested interest in you owning shares. Or it might have simply been a well-meaning friend. "You can't pick the bottom, just like you can't pick the top. So just buy stocks, and even if they fall in value in the short term they will always rise to a new high later on."

This sort of advice often goes along with the "Cash is Trash" mantra. Of course, if it were a realtor urging you, the "advice" would be quite different.

So, is it true? Do shares always rise in the long term?

That depends on what you mean by long term.

Ignoring dividends, if you had bought the Dow Jones index in 1965/66, do you know how long you would have had to wait to get your money back? Nearly seventeen years! That's right. The Dow first touched 1,000 points in January 1966 and then fell back. It never got back to 1,000 points until October 1982.

If you had bought near the top in 1929, do you know how long you would have had to wait for stock prices to get back to pre-crash levels? Twenty-five years! Yep, it was 1954 before the Dow put in a new high.

Apparently in the previous century there was a 43-year period during which Wall Street failed to reach a new peak.

More recently, in Australia, if you bought shares before the October 1987 correction, you would have had to hold them for a whole decade before they reached their pre-crash level again (apart from one fleeting touch in February 1994).

If you bought the Japanese Nikkei index before its peak in December 1989, you would still be down 50%, seventeen years later!

Wall Street's NASDAQ index is still about half what it was more than 7 years ago.

Does that answer the question?

Yes, shares will always rise in the long term. But you need to understand what is meant by "long term." Most who parrot the mantra never give it a thought.

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