Thursday 29 June 2017

Top 50 Rules to Investing - Rule : 32

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Top 50 Rules to Investing

Rule : 32 

Stocks Fall More Than You Think and Rise Higher than You Can Possibly Imagine.


How Falling Stock Prices Can Make You Rich

One of the most popular topics among new investors is how to deal with falling stock prices. Everyone talks a good game but the moment quoted market values decline, panic is not uncommon. I've seen it many times in my life. In periods building up to stock market highs, people on even conservative investment forums begin discussing the so-called prudence of a 100 percent equity asset allocation, suddenly thinking they have no business investing in bonds or maintaining reasonable cash reserves.

An ordinary 33 percent or so drop — and historically, that's business as usual from time to time — and suddenly they're gone, swearing off everything from individual stocks to index funds. I've told you this before and I'll tell you it, again: If you live an ordinary life expectancy, you will see your entire equity portfolio decline from peak-to-rough by 50 percent or more at least once, possibly thrice or more. The individual components will fluctuate much more wildly than the portfolio as a whole, to boot. It is the nature of the asset class. It cannot be avoided and anyone who tells you otherwise, be they a financial advisor or mutual fund salesman, is either lying or incompetent. There is no equivocating or qualification when it comes to the academic data. You don't have to invest in stocks to get rich so if this bothers you, accept that you don't deserve the returns they can generate and be fine with it.

That said, I want to talk about falling prices; how you, as an investor, should think about them if you know what you are doing and buying good assets. To do that, we need to back up and talk about stocks more generally for a moment.


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