As you watch the investment markets, you’ll find that often, you’re back where you started. I’m of course referring to the volatile nature of the markets, and its tendency to go every which way. You may think that a record high in the market is a cause for celebration, until it pulls back (for the umpteenth time) over the span of a few months.
During an upward move in the midst of a low interest environment, being in cash savings (e.g. high yield savings accounts and certificates of deposit) is much less appealing, while stocks look like a great play. Check out the historical chart showing the performance of the Dow Jones Industrials over a five year period (From Yahoo! Finance: click to enlarge).
A chart like this shows how you could end up being in the same spot even after 5 years, giving the impression that the market has not budged. But here’s the good news. The market has not made much progress, but if you had continued to invest regularly during the last year and had dollar cost averaged throughout this time, you’d be a happy (or relatively happier) camper.
One Year Investment Performance With An Automatic Savings Program
If you’re enrolled in an automatic savings program, you’ll find that this is one effective way to ensure that you gradually build your net worth. How effective is it? Let’s take a look at this case: I found this interesting example of how your investments would fare if you dollar cost average into a fluctuating market (the example is taken from Tomorrow’s Scholar College Savings Plan). They have a dollar cost averaging calculator where I plugged in a monthly investment amount of $1,000 as an example and got these results:
The monthly investment of $1,000 invested over a hypothetical one year period yielded some nice results even though the share prices shown during that year seemingly went nowhere. In this particular case, the return is 17%! Now apply this example to a situation where the market dips then rises and returns to its former levels. Taking this approach should help you achieve positive returns (which could actually be more fruitful if you’ve doubled down when the market was at its lowest). If you don’t dollar cost average but instead rebalance your portfolio when the DJIA carves out a bottom, then you’re also likely to see some gains as the market recovers.
So did you make any money this past year? Do you employ this strategy with your investments?
For more on this topic, check out my articles. These can explain why a market dip may not be too bad.
- Lump Sum Investing, Value Cost Averaging & DCA: Investment Timing Strategies
- Contrarian Investing During A Bad Market
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