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Market Risk, Timing, and Formula Strategies

Whether you call it investing or playing the market, buying and selling stocks is risky business—risky but lucrative. In choosing to read this book, you have likely decided to build an investment portfolio that may include some of those risky stocks in order to garner some of those lucrative rewards. Before making investment decisions, you should have a reasonable idea of the typical risks you will face in the stock market and the likely rewards you might expect to earn. This chapter provides an introduction to these issues and familiarizes you with some historical data on market performance.

RISK AND MARKET RETURNS

First we will look at the investment returns that have been earned in the stock market in the past. Later in this section we discuss the risk inherent in these returns. Together, this information will provide you with a realistic sense of your opportunities in the stock market.

Market Returns over Time

When any wise market prognosticator is asked the inevitable question: Is the stock market going to move up or down?, the unsatisfying but correct answer is: Yes, it will. Day-to-day movements are anyone's guess, but over time the market has risen substantially. Stock price movements for the past 66 years are shown in Figure 1-1.1

Figure 1-1 MONTHLY STOCK PRICE LEVELS, 1926–1991

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The average value of all listed NYSE and AMEX ...

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