Jim'sMoneyBlog

Financial Opinion and Insights

Should ‘Builders’ Avoid Choppy Markets?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

 

Uncertainty has been a part of investing since investing began; and the world is full of people who are always ‘waiting to see what the market will do’.  Unfortunately for them, it keeps doing the same thing and they never begin investing. 

The result?  Most Americans are unprepared for retirement. 

So, what about now?  Should you be investing in your 401(k)?  Does it make sense for someone who wants to grow assets to invest in a choppy `non-bull’ market?   

In my own opinion, it does!   

Here’s a  little  hypothetical exercise might provide a clue as to why most investment experts advise consistent investing.  

In our example, the price of our fictitious investment begins and $50 and goes down.  In fact, it takes 10 years just to get back to it’s initial price!   Did systematic investing seem worthwhile?  You be the judge. 

For a benchmark, lets use a beginning value of $20,000.   How would someone compare who invested $2,000 a year for ten years?

Systematic Investing In a Down Market            
         Benchmark      Second Investor    
Market Year Price    $ Amt # Shares    $ Amt  # Shares Cum # Sh
  1 $50   $20,000 400   $2,000 40.000 40.000
-20% 2 $40     0   $2,000 50.000 90.000
20% 3 $48     0   $2,000 41.667 131.667
-25% 4 $36     0   $2,000 55.556 187.222
20% 5 $43     0   $2,000 46.296 233.519
-30% 6 $30     0   $2,000 66.138 299.656
20% 7 $36     0   $2,000 55.115 354.771
20% 8 $44     0   $2,000 45.929 400.700
-10% 9 $39     0   $2,000 51.032 451.732
28% 10 $50     0   $2,000 39.869 491.600

Lets examine the results:

Totals       $20,000 400   $20,000 491.600
Portfolio Value     $20,066     $24,661  
Average Cost per Share   $50     $40.68  
Value Per Share     $50     $50  
Profit Per Share     $0.16     $9.48  
Portfolio Profit     $66     $4,660.91  

Interesting!   Our systematic investor made a $4,660 profit on $20,000 – that’s 23%! –  in a market that never went rose above its beginning point! 

Our ‘systematic’ investor averaged a compounded 4.57% per year in a ‘flat’ market! 

Sure, it’s hypothetical; but the lesson seems clear;  maybe money is made when everyone else is biting their nails. 

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Opinions expressed in this post are those of the author and are not intended to provide investment advice.   Learn more about IFG!