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Chapter 2. Two Quick-and-Dirty Stock Mar... > Identifying High- and Low-Risk Inves...

Identifying High- and Low-Risk Investment Climates

As we know, all stocks, mutual funds, and related investments are not equal. In Chapter 1, “The No-Frills Investment Strategy,” we considered a strategy for identifying investments that are likely to prove more equal than the general population. Similarly, not all investment climates are equal. During some periods, stocks seem to rise effortlessly; during other periods, gains, if any, are more labored and intermittent. In this chapter, you will learn two readily applied strategies for segregating climates that are generally more favorable for stocks from climates that are, on average, really not much better than neutral climates and that represent periods when severe stock market declines are most likely to take place.

Let’s consider possible alternatives. In the first, you invest in the stock market at all times, a strategy that has worked out well enough over the very long run. Stocks, on average, have had a century-long tendency to produce annual rates of total return of roughly 10% per year. However, you would have had to live through some serious bear markets—1929–1932, 1969–1970, 1973–1974, and 2000–2002—not to mention numerous other periods in between when stocks underwent serious intermediate and major term declines. In the second scenario, you invest only when certain investment models indicate that market moods are benevolent and the probabilities are more favorable than average that stocks will advance in price.


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