Financial Opinion and Insights

Does Market Avoidance Really Work?

IFG BlogWe’ve been in choppy times since 2008.  Many people feel the markets are ‘uncertain’ and have been avoiding the markets until they “see what the market will do”.  It’s an old mantra I remember hearing when I began in this business more than twenty years ago.  The markets were uncertain then, too.  Problem is, markets are always uncertain. 

Has avoidance worked?  Not likely.  Investors who wait until they feel good about the markets are, by definition, waiting until the market has gone up – they buy ‘high’, which means they usually are overpaying, rather than underpaying, for their investments.

Investors who have self-discipline, or lucky enough to be in auto-enrollment, automatic increase company retirement plans, have probably done a little better.

Let’s use a little hypothetical mathematical exercise to illustrate the point.  Let’s compare two investors: 

One has $20,000 in a retirement plan but stops investing just as the market starts to go down…. And won’t invest again until the market ‘comes back’. 

The other investor who has NO money in a retirement plan, but actually starts investing when everyone else is freezing up! 

Now let’s assume a market that starts going down and takes six years to realize a 30% loss, then ten years just to get back to even. 

Both investors end-up with the same amount invested in the same market, represented with a starting price of 50.

Who won?

Hmmm.  Maybe buying ‘on the cheap’ is good, ya’ think?


Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st 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 provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors.

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IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG does not provide legal or tax advice and nothing contained herein should be construed as  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®

June 21, 2012 at 8:00 am

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