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Financial Opinion and Insights

Systematic Investing When It’s Out of Fashion

 

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

Does it make sense for a younger investor to invest in his/her 401(k) during a ‘non-bull’ market? 

 This little 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.

 

 

Systematic Investing During Difficult Times            
                   
Market Year Price    $ Amt # Shares    $ Amt  # Shares Cum # Sh
 

1

$50

 

$20,000

400.000

 

$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

                   
                   
                   
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

   

 

Point:  Our ‘systematic’ investor averaged a compounded 4.57% per year in a ‘flat’ market while the person who made a one-time purchase was virtually at a zero return ($66 over 10 years on a $20,000 investment).

 

 

 

This example is presented as an illustration for educational purposes only and does not represent any investment or index.  No conclusions about the future of any investment or index should be drawn from this example. 

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

 

Written by Jim Lorenzen, CFP®, AIF®

July 13, 2011 at 8:15 am