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Source Articles from

THE WALL STREET JOURNAL. CLASSROOM EDITION

Chapter 11 Financial Markets This article from the March 2001 Wall Street Journal Classroom Edition offers advice on how to succeed in the stock market. "Smart Investing" by Wall Street Journal Staff Reporter Douglas R. Sease describes three handy market strategies for individual investors to consider before putting money into the stock market: long-term investing, diversification and index funds.

Before reading the article below, you may want to look up the following terms: brokers, devastating, diversify, mimic, offset and volatile.

W illie Sutton, a famous British bank rob-ber, was once asked why he robbed banks. "That's where the money is," he replied. That's the same reason that people invest in

stocks, which represent ownership of a company. Of all the things you can invest your money in- bank accounts, savings bonds or real estate, for instance-stocks are by far the best, because they have the highest rates of return over the long haul, averaging about 12% per year over long time periods.

So why doesn't everyone rush right out and invest all their money in stocks? T he major reason is that a lot of

people fear stocks because they know stock prices move both up and down, sometimes dramatically, and their fear of losing money overcomes their desire to try to make money. Remember that the 12% return we just talked about is an average annual return over a long time period. In short periods of time, individual stocks, and the entire stock market as well, can be remarkably volatile. Individual stocks may soar or plunge 50% or more in a given year and the overall stock market can move 20% up or down in an unusually good or bad year.

But there are ways for people to overcome their fears of losing money and become successful stock market investors. The first and most impor- tant rule is to only invest money that won't be needed for at least five years . That's the shortest period in which the overall upward trend of stocks will be likely to offset the short-term ups and downs of stock prices. The second most important rule is to diversify. That means stock market investors should own lots of different stocks rather than only one or two . T hat way,

unexpectedly bad news about a single stock won't have a devastating impact on an investor.

"A lot of people fear stocks

because they know stock A third rule, and one that's difficult to obey, will be very useful to any long- term investor: Don't try to beat the market. You're probably familiar with the terms like the Dow Jones Industrial Average or Stan- dard and Poor's 500-stock Index. T hese are tools that measure how groups of stocks in big American com-

panies move. Many investors make it their goal to get better returns than the Dow or the S&P 500. Yet most of them fail, and it isn't difficult to understand why.

prices move both up and

down~ sometimes dramati-

cally~ and their fear of losing

money overcomes their desire k to try to ma e money. "

The Dow and the S&P 500 reflect the average

Chapter 11 Source Articles from The Wall Street Journal Classroom Edition 29

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Source Articles from The Wall Street Journal Classroom Edition

of all investors' decisions about which stocks to buy and sell. Since they're averages, in theory one would expect 50% of all investors to do better than the Dow or S&P and 50% to do worse. But in reality, even fewer than 50% can expect to beat the market. That's because individual investors must pay fees to buy and sell stocks, and they must pay taxes on any gains they make. So by set- ting out to beat the market, investors are taking a great risk-better than 50%-that they will fa il.

They can, however, easily try to match what- ever the market does, using a tool called a stock-index mutual fund. A mutual fund is an organized and regulated group of people who pool their money to buy stocks or bonds, and anyone with suffi- cient money to invest-some funds set minimums as low as

$500-can buy a share of a mutual fund. Some mutual funds-called managed funds-aim to beat the market by regularly shuffling their mix of stocks.

Index mutual funds, on the other hand, aim to mimic the market's performance by investing in the same big-company stocks that are tracked by the main market indexes. And because these funds have very low fees, investors have more of their money at work in the stock market rather than going into the pockets of brokers or fund

managers.

"The first and most impor- So if you want to be a

long-term investor and get the best returns on your money for the rest of your life, stock index funds are the best tools for the job. They can help take some of the fear out of investing.

30

tant rule is to only invest

money that won't be needed

for at least five years."

QUESTIONS FOR DISCUSSION

1. Why is the first rule of investing to only invest money that won't be needed for at least five years?

2. Why doesn't the theory of averages work for investing in the Dow Jones Industrial Average or the Standard & Poor's 500-stock Index?

3. Making Comparisons What is the difference between a managed mutual fund and an index mutual fund?

4. Drawing Conslusions Has this article persuaded you to invest your money in individual stocks or mutual funds? Why?

Chapter 11 Source Articles from The Wall Street Journal Classroom Edition

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