The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 48. Why Stocks?

YOU KNOW by now why you should buy stocks: they represent the investment with the greatest growth potential. If you rode through the bear market of 2007 to 2009, you probably know why you shouldn't buy stocks: They represent the investment with a great potential for loss. Studying the stock market can be a lifetime job, as it is for many professionals. Even if you are just a novice, you probably understand that no one really knows when the market will go up or why and when it might head down. Hundreds of theories exist on what moves the markets and when and how to invest.

Yet if you followed the market on October 27, 1987, when it plummeted by 554 points and then gained 337 points the following day, you probably see the mystery in the movements of the market. Or what about more recent history, like the first quarter of 2009? The Dow Jones Industrials Average hit a twelve-year low of 6,469.95 on March 9 and then gained 21 percent in the following thirteen trading days to close at 7,924.56 on March 26. A bull market is defined as a rise of 20 percent from the recent bottom. According to common Wall Street definition, this was the fastest 20 percent rebound from a bear market low since 1938.

Don't make the mistake of thinking that you must understand all this stuff in order to be an investor. Think of it like peeling an onion: Peel off as many or as few layers as you like. The number of layers you choose and the amount of time you want to spend with the onion ...