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More to the Story

The evidence on stock market timing is decidedly mixed. While some timing indicators seem to offer promise in predicting market direction, those who use them do not earn excess returns. How do you explain this contradiction? In this section, you will look at the reasons why an unshakeable faith in equity markets in the long term can be dangerous and why market-timing indicators do not pay off for most investors.

Stocks Are Not Riskless in the Long Term

In bear markets, you do not have to spend much time convincing investors that investing in stocks is risky, but a prolonged and strong bull market often leads these same investors to the conclusion that equity is not risky, at least in the long term. Earlier in the chapter, you examined some of the evidence, primarily from the U.S. market since 1926, used to sustain this point of view. In this section, you will evaluate the evidence from other equity markets in the world to see if it backs up the evidence in the United States.


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