If you bought a stock on VJ day would you be rich or poor?

Let's say you were around on VJ day, September 2, 1945, which was the day that Japan formally surrendered at the end of World War II. For the month of September 1945, the Dow Jones Industrial Average was at $180. Sixty years later in September 2005, the DJIA was $4,789. That is an increase of over 2600% over 60 years.

The problem is that the increase in the DJIA was not a straight line; it went up and down the entire time. If you could not wait for 60 years but only had 40 years, the price in September 1985 was $1,329, which is only a bit better than 700% for the four decades. If you only could wait 20 years, the price in September 1965 was $931, which was a bit better than a 500% increase.

How does this compare to interest earned in a bank? If you put $180 into a bank account and it earns 8.22% compounded daily for 20 years, then you will have about $931 (the same value as the DJIA that year). For 40 years, the $180 invested at 5% would result in your $1,329. The 60 year mark would turn your $180 into $4792 at 5.47%. This shows that the timing of your buying and selling can have a dramatic impact on the return of that investment.

“Buy and hold” may be good, but it does not necessarily mean that the longer you hold your investment, the wealthier you will become! This is due to the erratic nature of the stock market. You need a system that can maximize the return during the peaks and minimize the risk on the valleys. Five to eight percent returns seem quite small, especially for something as high-risk as the stock market.

Five to eight percent returns are probably adequate for a bank, but this is not a safe, FDIC-insured bank. This is a highly-volatile holding that can decline in value quite rapidly. Conservative banks can pay a lower interest rate because the saver can be assured that the rate of return is safe. In the stock market, your only stability comes from your understanding of what is happening to your investment.

You need a system that allows you to evaluate companies, buy into those companies that are good investments, and then transfer that money to other companies when the investment is better elsewhere. That system is described in my book, The Confident Investor. You can purchase my book wherever books are sold such as AmazonBarnes and Noble, and Books A Million. It is available in ebook formats for NookKindle, and iPad.

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