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Sunday, August 22, 2010
One of the reasons do-it-yourself investors should "buy the market" when investing is the importance of being invested in those companies that do the best over the long term.
Suppose the market is comprised of 10 stocks. We might expect that 2 will do really well, 2 will be duds, and the rest will achieve market performance.
What about the 2 duds? Let's assume they are really bad and go to zero - think Fannie and/or Freddie. What about the 2 that do really well? They are likely to go up 3 or 4 times (or much more, especially over the long run) their purchase price - think Apple or Price Line.
So the most you can lose in the duds is 100%, but the upside is unlimited for the winners.
To prevent misunderstanding, I am advocating buying the market. The 10-stocks example is for illustrative purposes only. Buying 10 stocks can be highly detrimental to your financial health!