Wednesday, April 8, 2009

So - Is it safe to buy?

A month ago people were asking if they should sell. Now they are tentatively asking if it’s safe to buy. Why the change of heart? It’s fairly obvious - In the last 30 days or so the stock market is up about 20%. Investing seems a lot safer – as well as a lot more fun - when the market is going up.

So, is it safer to buy after the market has gone up for a month? Actually, yes – at least a little bit. When the stock market is up over a month, there is about a 63% chance it will be up the next month. This compares to only a 58% chance of making money after a down month.

Does this mean you should back up the truck now that the market is up over 30 days and then dump it all after the next down month? After all, a 63% chance of success is better than a 58% chance of success.

Probably not a good idea. Even ignoring how taxes and expenses would eat up the 5% probability difference, you are still almost as likely to lose money as make money. However you look at it, investing on a month- to-month or even year-to-year basis is very risky. There is no way around the reality that you have a very strong chance of losing a lot of money.

Over a 20 year period, however, the stock market becomes a lot safer. If you commit your money for the whole 20 years, you have a better than 95% chance of making money – and that’s a conservative estimate. Including the great depression, there has never been a 20 year period where stocks have actually lost money.

In the end, safety in the stock market comes not from when you buy or sell, but from how long you stay invested.

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