A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

A RANDOM WALK DOWN WALL STREET

Dollar-cost averaging is not a panacea that eliminates the risk of investing in common stocks. It will not save your 401(k) plan from a devastating fall in value during a year such as 2008, because no plan can protect you from a punishing bear market. And you must have both the cash and the confidence to continue making the periodic investments even when the sky is the darkest. No matter how scary the financial news, no matter how difficult it is to see any signs of optimism, you must not interrupt the automatic-pilot nature of the program. Because if you do, you will lose the benefit of buying at least some of your shares after a sharp market decline when they are for sale at low prices. Dollar-cost averaging will give you this bargain: Your average price per share will be lower than the average price at which you bought shares. Why? Because you’ll buy more shares at low prices and fewer at high prices.

Thus, they cannot count on salary income to sustain them if the stock market has a period of negative returns.

for investors whose holding periods can be measured in twenty-five years or more, and especially those who reinvest their dividends and even add to their holdings through dollar-cost averaging, common stocks are very likely to provide higher returns than are available from safe bonds and even safer government-guaranteed savings accounts.

common stocks have produced near-zero overall returns

I do not mean to argue that stocks are not risky over long holding periods. Certainly the variability of the final value of your portfolio does increase the longer you hold your stocks.

In one year, the rate of return from a typical stock portfolio was more than 52 percent, whereas in another year it was negative by 37 percent. Clearly, there is no dependability of earning an adequate rate of return in any single year. A one-year U.S. Treasury security or a one-year government-guaranteed certificate of deposit is the investment for those who need the money next year.

A substantial amount (but not all) of the risk of common-stock investment can be eliminated by adopting a program of long-term ownership and sticking to it through thick and thin (the buy-and-hold strategy discussed in earlier chapters).

Your Actual Risk in Stock and Bond Investing Depends on the Length of Time You Hold Your Investment

But this return came only at substantial risk to investors. Total returns were negative in about three years out of ten. So as you reach for higher returns, never forget the saying “There ain’t no such thing as a free lunch.” Higher risk is the price one pays for more generous returns.