Market Overview, March 2009
What happened in 2008?
In the past 183 years of historical S&P 500 index pricing, there were only 3 years with negative returns of more than 30%. Those were 1931, 1937 and 2008.
The main catalyst of this downward spiral was the collapse of Lehman Brothers, which subsequently caused banks worldwide to tighten their purse strings, not lending money and reducing the money supply in the economy. This led to other problems that directly or indirectly precipitated the recession.
However, data and research have given us a glimmer of hope that we should not fall into Depression.
US Economic data (since World War II) shows that for every economic contraction (average duration: 10 months), it is followed by a much longer economic expansion (average duration: 61 months). Thus markets tend to rise over the long term.
What are investors’ options now???
- Sell off, cut losses, hold cash?
- Switch to something else?
- Buy in to average down?
- Hold & Hope?
- Or… ???
If you are already suffering a loss in your investment, which of the above should you follow?
It is a well known fact that staying invested potentially pays off. The longer one holds on, the more stable the gains. However, this may also mean that an investor has to wait for some time before breaking even.
You may wish to consider Dollar Cost Averaging, as this is an effective method of lowering your average price of your investments. By lowering your average price, it will also be easier (and faster) for your investment to break even and make profit from there onwards. What you can do is break up your existing investible capital into portions, and investing each portion at specific time intervals.
My chart shows an example that while a person who waits and holds breaks even after 8 years, the Dollar-Cost Averaging investor made over 53% in the same time frame.
Combining the Power of Dollar Cost Averaging with Diversification
The Dollar-Cost Averaging component reduces market risk while the fund investment element reduces company specific risk. This combination can be among the most effective investment tools for investors looking to build up long-term wealth by having a share of their portfolio in equities.