So here we find ourselves. I won’t go so far as to say that things feel good, but at least it doesn’t appear as though the sky is falling any longer. Will we remain at this “comfortable” level? I’m not sure and I don’t think that anyone knows for sure. What I do believe, however, is that we have made it through the worst of it. While I can’t be positive, I am inclined to suggest that the Dow will not (I say this with fingers crossed) slide back down to that dreadful 6500 level.
I had a meeting with one of my younger clients last week and I explained to him that I did feel we were through the worst part of this mess. Being a younger client, I had previously explained the specific benefits of Dollar Cost Averaging and, in addition to their employer sponsored retirement plans, began a periodic investment program for he and his wife. Thankfully, the two of them stayed disciplined and committed through all of the nastiness. Even through October, November, February, and March they continued with their periodic investment plan.
Now that the smoke has begun to clear, he explained that many of his friends had completely cut-off their monthly investments. He explained that they had reached a point where they basically couldn’t handle it anymore. In the investment world, we call this capitulation. He then asked me a great question. He said, “Brian, it was hard for my wife and I to stay the course, but we did. Is there any way you can show me how those specific investments have done over this crazy period in the market?”
I thought this was such a great question that Bo and I have decided to create a research document for the Premium section in which we show the benefit of staying the course through the worst of times. As you listen to the show I share some performance of periodic investments in a large cap growth mutual fund for a younger individual, a moderate balanced fund for an older individual, and then even a simplified asset allocation fund for a middle-of-the-road investor.
In the very darkest of times (the first part of March), investments made in September into each of the three funds explained above were down 34.18%, 25.93%, and 29.31% respectively. If you weren’t investing over this period, try to take a step back and ask yourself how it would feel to know that an investment you had made no more than 6 months earlier had lost a third of its value. This is the point at which many people (the peers of my client) decided they were done with this whole stock market and investing thing.
But, for those educated and disciplined individuals like my client who stayed the course, they now have a chance to look back and see how beneficial that decision was. Periodic contributions made in March in the funds above have now returned 32.18%, 24.29%, and 46.31% respectively. Those are outstanding returns for a 5 month period!
“But Brian, you cherry-picked two days. It was bad for months! How did those individuals do over that whole time period when the sky was falling?”. That is a great question and I’m glad you asked! In just one year (from September 2008 to now), these three individuals on a periodic investing plan that stayed the course and didn’t try to time the markets have experienced an overall return of 11.11%, 8.4%, and 14.06%. If you ask me, I think those numbers speak for themselves as to whether it was a good idea to make that tough decision and, even when it wasn’t easy to do, stick to the original plan! As Dave Ramsey says, “Live like no one else so that you can live like no one else”.
Patrick Noyce says
August 12, 2009 at 6:42 pm$100000 looses 29% leaving 71000. comes back at 32% $22,700 equalling total of $93720.00 still down 6.3 % I hate percentages talk $$$$$
Brian Preston says
August 13, 2009 at 10:45 amPatrick,
You are spot-on, however, I believe you missed the point of the show. I was attempting to show the benefits of dollar cost averaging and staying disciplined through the darkest of times. Let’s assume that instead of investing $100,000 at one time in September, you invest $10,000 every month beginning in September (I understand this is going to equal an investment of $120,000, but I would prefer to use nice round numbers for the sake of demonstration) and lasting until August of this year. If you were to check your investments (I’m using a large-cap growth mutual fund) in March of 2009 (the darkest of times) your monthly contributions’ performance would be: (beginning in Sep.) -34.18%, -23.82%, -16.53%, -7.99%, -15.42%, -11.03%, and -2.02%. This leaves your $70,000 total investment at $58,901; a total return of -15.86%.
HOWEVER, if you were disciplined and stuck it out through these hard times and continued investing monthly all the way through August, your individual investment performance for each contribution would be (beginning in Sep.): -11.20%, 2.77%, 12.60%, 24.12%, 14.58%, 20.03%, 32.18%, 15.34%, 8.04%, 5.52%, 9.86%, and -0.47%. Your $120,000 would now be worth $133,337; a total return of 11.11%.
Whether we are talking dollars or percentages, I think you can see the value of having a sound plan and sticking to it!
Spike says
August 14, 2009 at 3:15 pmThe illustration above was very, very helpful in exemplifying the principle of dollar cost averaging. I think what happens with most people is that psychologically, they imagine their money disappearing. What your example helps to point out is how the investment vehicle itself doesn’t disappear, but how continuing to put in through lower valuations will usually average out positive over time.
Ben says
August 15, 2009 at 2:23 amHey Brian,
Thank you so much for keeping up with this podcast. I’ve been a listener for about a year now and I have to say, your advice has definitely given me a one-up on my peers in terms of financial skills. A quick tip: in addition to bing.com, there is another site that also does cash back rewards, ebates.com. They seem to have a wider selection of stores and from my experience have been a phenomenal tool for finding the absolute best deal.
Keep up the excellent work!
– Ben from NY