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Miss Cleo says: Stocks still a good long term investment

July 19, 2011

Call me and I'll tell you your future!

I used to get a pretty good kick out of Miss Cleo. Remember her? You would see her commercials with her signature phrase of, “Call me, and I can tell you your future.” It is estimated this self-proclaimed psychic earned $13.5 million from 1997 to 2003.

It was pretty obvious that Miss Cleo could not tell you your future, but there were still many who believed she could — and they were willing to pay by the minute for this hope. It seems like we, too, want to believe that we can use our knowledge and analysis to predict the future.

Last week the major stock markets nearly had their worst week of the year. Three weeks ago, the major stock markets had their best week in two years. When one looks at these facts it makes it easy to question our faith in the markets.

A study showed that from December 1989 to December 2009, the S&P 500 averaged an annual return of 8.2 percent, and then followed up 2010 with a 12.78 percent gain. Even with the tech bubble at the start of the century and the financial crisis of 2008, stocks still tend to be one of the best long-term investments.

This being said, at the same time, the average stock investor only earned 3.2 percent from 1989 to 2009. Why is this? Usually, it has to do with market timing. If you are an investor who uses a buy-and-hold strategy, where you buy a set dollar amount of a mutual fund that tries to mirror the market, you can expect returns of eight to 10 percent over a long period of time.

Even though this has proven to be true for around the past 100 years, many investors think they know when to buy and sell. For the average investor this has not worked out. Many individuals get overconfident when the market is rising and decide to buy more. On the flip side, many others get scared when the market is falling and tend to sell at the bottom.

This is where human psychology goes against the very basic market advice of buy low and sell high. Because of our own confidence and fear, we buy high and sell low. The last few years have been very trying, and some investments have not gotten back up to where they were four years ago, but many buy and hold investors were able to continue to buy while the market was at the bottom and some recent investments have seen very good growth.

A good example of this is shown by a sample investment in 1994 and what would happen if an investor missed some of the best days in the market. From 1994 to 2004, the S&P averaged 12.07 percent a year. If you had withdrawn your money and missed the 10 best days between 1994 and 2004, your rate of return would have fallen to 6.89 percent.  Missing the best 20 days in this time period would give you a 2.98 percent, and if you missed the 30 best days, you would have actually lost 0.39 percent.

The future can be a little scary. Many countries in Europe are having trouble with their debt. It is unsure if the U.S. will reach an agreement to raise the debt ceiling. Unemployment remains high. I do not know what the market is going to do tomorrow, next week or next year, but I still believe that investing in companies is the best long-term investment for me.

My retirement and school savings will go up and down, but I am going to continue to invest in a general stock mutual fund every month, which I believe will give me the best chance to grow wealth in the future. If you want to try and time the market, however, I suggest you try to call Miss Cleo. She knows how to make money.

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