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Mutual funds for dummies - Tyson E

Tyson E. Mutual funds for dummies - Wiley publishing , 1998. - 425 p.
ISBN 0-7645-5112-4
Download (direct link): mutualfundsfordummies1998.pdf
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v* The stock market is not the place to invest money that you’ll need to tap in the near future (certainly not money you’ll need to use within the next five years). If your stock holdings take a dive, you don’t want to be forced to sell when your investments have lost value. So come along for the ride — but only if you can stay for a while!
If you’re looking for magic ways to build a vast fortune without peril, you’ve come to the wrong book. But, gentle reader, if you want insights for how you can tap into one of the best investment funds to make your money grow, read on.
Stock Funds: A Place to Grout Hour Money
As I explain in Chapter 1, stocks represent a share of ownership in a company and its profits. As companies (and economies in general) grow and expand, stocks represent a way for investors to share in that growth and success.
Over the last two centuries, investors holding diversified stock portfolios earned a rate of return averaging about 10 percent per year, which ended up being about 7 percent higher than the rate of inflation. Earning 7 percent per year more than the rate of inflation may not seem like much (especially in a world with gurus and brokers telling you that they can make you 20 percent, 50 percent, or more per year). But don’t forget the power of compounding:
At 7 percent per year, the purchasing power of your invested money doubles about every ten years.
Chapter 9: Funds for Longer-Term Needs: Stock Funds
Contrast this return with bond and money market investments, which have historically returned just a percent or two per year over the rate of inflation. At these rates of return, the purchasing power of your invested money takes several decades or more to double.
Your investment’s return relative to the rate of inflation determines the growth in purchasing power of your portfolio. What’s called the real growth rate on your investments is the rate of return your investments earn per year minus the yearly rate of inflation. If the cost of living is increasing at 3 percent per year and your money is invested in a bank savings account paying you 3 percent per year, you’re treading water — your real rate of return is zero. (On top of inflation, when you invest money outside of a tax-sheltered retirement account, you end up paying taxes on your returns, which could lead to a negative real “growth” in your money’s purchasing power!)
Be patient«..
Disclaimer: The 10 percent historic return in stocks that I quote is not guaranteed to be the same in the future. Consider some of these unexpected storms that hammered the stock market over the past century (see Table 9-1).
Table 9-1 Great Plunges (20 Percent or More) in the Dow Jones Industrial Average Index of Large Company Stocks
Years Percent Decline* Years Percent Decline*
1890-1896 47% 1946-1949 24%
1899-1900 32% 1961-1962 27%
1901-1903 46% 1966 25%
1906-1907 49% 1968-1970 36%
1909-1914 29% 1973-1974 45%
1916-1917 40% 1976-1978 27%
1919-1921 47% 1981-1982 24%
1929-1932 89% 1987 36%
1937-1942 52%
* Please note that the returns that stock market investors earned during these periods would differ slightly from the above figures, which ignore dividends paid by stocks. The returns also ignore changes in the cost of living, which normally increases over time and thus makes these drops seem even worse. The Great Depression is the exception to that rule: The cost of living dropped then.
212 Part II: Establishing a Great Fund Portfolio
As you see in Table 9-1, the stock market can take a beating. But before you let the chart convince you to avoid the stock market at all costs for the rest of your life, look at the time periods during which those great plunges occurred. Notice how short most of those periods are. During the last century, major stock market declines have lasted less than two years on average. Some of the 20 percent-plus declines lasted less than one year. The longest declines (1890-1896, 1909-1914, 1929-1932, 1937-1942, and 1946-1949) lasted six, five, three, five, and three years, respectively.
Table 9-1 tells less than half the story. True, the stock market can suffer major losses. But over the long haul, stocks make more money than they lose. That’s how they end up with that 10 percent average annual long-term return I’ve been telling you about.
Stock market crashes may be dramatic, but consider the powerful advances (see Table 9-2) that have happened after big market declines.
Table 9-2 Great Surges in the Dow Jones Industrial Average after Major Market Declines
Years Percent Increase
1896-1899 173%
1914-1916 114%
1932-1937 372%
1942-1946 129%
1949-1956 222%
1962-1966 86%
1970-1973 67%
1974-1976 76%
1987-1998 420%
These stock market increases more than made up for the previous declines. In other words, wait long enough, and time will bail you out! This is why I emphasize that stocks are for long-term investors and long-term goals. If you’re going to invest in stocks, you must have the time on your side to wait out a major market decline. If you don’t, you face the risk that you’ll have to sell your stocks for a loss. Don’t keep your emergency money in stocks. Only invest money that you don’t plan on using for at least five years, preferably ten or more.
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