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Chapter 7. Timing the Market

Want to increase your returns? All you have to do is invest in the stock market when it is going up, and then get out before it goes back down. For example, if you purchased a $1,000 portfolio of Dow Jones Industrial Average (DJIA) stocks at the beginning of 1946, it would have been worth $116,000 at the end of 1991. This equates to an 11.2% annual return during the period.[1] Note that this does not even include the great bull market of the 1990s. However, if you were able to avoid the stock market during its 50 worst months, your $1,000 portfolio would have grown to $2,541,000, a 19.0% annualized return! Missing the worst 50 months gives you over 20 times more money.

This sounds appealing. Of course, if you are the worst market timer, you may be out of the stock market during the 50 best months and invested in the stock market during the worst 50 months. If this turned out to be the case, your $1,000 would be worth $4,000 at the end of 1991 for a paltry 3.7% annualized return.


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