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Stocks can go down

Click for accompanying notes, and online audio samples from our tape.

Host

But why would anyone want to invest in bonds or bank CDs when the stock market's been doing so well lately?

David

It's been doing well lately, Host, but I can't help but think the US stock market's getting a little overheated.

Host

So people shouldn't invest in US stocks?

David

No, I wouldn't say that at all. But I wouldn't mortgage my house or otherwise borrow money to invest in stocks at these levels. I've had first hand experience with a market where that happened, and the end result wasn't pretty.

Host

What was that experience?

David

I discuss this in my program on stock investing, but I lived in Japan for five years in the late 1980s and early 1990s.

At that time the Japanese market was pumped up with borrowed money, and then the market dropped over 60 percent in the early 1990s. This drop was bad enough, but it ruined those who used borrowed money to buy stocks.

Host

Could that happen in America?

David

It's probably not as likely, but remember the US stock market lost 23 percent in one day in 1987. There are no guarantees when it comes to stock investing.

Host

So what's a good strategy?

David

Depending on your age and risk tolerance, I think you always have to have a fair amount of money invested in stocks. But I wouldn't recommend you become a short-term trader or market timer who's constantly shifting in and out of stocks.

Host

Why not? If you could find a way to buy low and sell high wouldn't you come out ahead of others?

David

Sure, if you could time these things precisely. Research indicates this strategy doesn't work in practice. So instead of trying to outsmart millions of intelligent other investors out there, I have a more modest proposal to help you financially.

Body text copyright 1997 by David Luhman