Uninformed Investors often suffer Catatstrophic Losses

A catastrophic loss is defined as a stock suffering a 70% or greater permanent loss. This means someone bought a stock at 10 and it went down to 3 and never went back up. Sadly this is the fate of many stocks. Since 1980 about 40% of the stocks in the Russell 3000 index suffered such a loss. According to Michael Batnick and A Wealth of Common Sense, these stocks never recovered. Since this index holds most of the widely known stocks in our country, there is a 40% chance that you will pick a stock and lose most of your money over the long term. This means two things. One, buying an individual stock because it crashed is not such a good idea. It may just stay there. Two, buying an index that holds hundreds or thousands of stocks is a much better and less risky alternative. The financial landscape is filled with the graves of the 40%. Most investors have no idea what they are getting into when they try to be the next Warren Buffet. The cold hard facts are picking stocks is VERY difficult and if you succeed, many times luck played a huge role. There has never been a twenty year period when the S&P 500 suffered a loss. The same cannot be said for GM, Enron, AIG, or the infamous Pets.com.


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