despite some promising signs, the
worst global economic downturn
since the Great Depression isn’t
over—that we may be headed for a
second trough.
This doesn’t mean you should
abandon stocks. On the contrary, you
need their higher long-term returns
to build your retirement savings. You
just have to learn how to ride out the
losses. Remembering these five
market truths will help.
1. The market knows
much less than you think
Stock prices aren’t a mirror held up to
the present. The market reflects investors’ guesswork about what might
happen tomorrow, next week, or six
months from now. The disconnect
between the two became particularly
clear when the economy tanked. In
2009 we were deep in a recession that
cost more than 8 million people their
jobs, and housing prices had taken
their biggest dive since the 1930s. Yet
from its low in March 2009 to its high
in April 2010, the S&P 500 Index rose
an astounding 80 percent—a speculative bull market fueled largely by the
Federal Reserve’s near-zero interest rates. This is why trying to buy
stocks at the bottom and sell them at
the top is so hard. Sometimes stocks
command more than they’re worth,
sometimes less. Your best strategy is
called dollar-cost averaging: Invest
the same amount regularly so you get
fewer shares when prices are high and
more when they are low.
2. Professional traders
are short sighted
In May a crop of genuinely upbeat
economic news—a little more hiring,
stabilizing home prices, rising consumer confidence—offered signs of
a nascent recovery. At the same time
the stock market plummeted. The
S&P 500 Index lost 10. 5 percent—its
