How a Down Stock Market Can Be Your Friend
I know too many people who have the thought that a down market with falling stock prices should be avoided at all costs. In fact, this is one of the main reasons that keeps us from investing. We start thinking that we work too hard for our money. We do not want to see our investments go down with a declining market. Although experiencing a down market is never a good feeling, unless you are selling your investments during this time, the lower values are only paper losses and don't really matter unless you are actually selling the investment.
O.K. how can this down market be your friend? There are three things working in your favor: consistency, dollar cost averaging, and time. Let’s see how that works.
Consistency is one of the keys to building wealth. If your investment purchases are automated and you do it month after month, then you take the emotions out of investing. This allows you to keep your investing on track even when the stock market is going down. You don’t have to think about should I buy now or wait on a better price. You take away trying to time the market, but instead you allow your investments to continue to build consistently over time. This approach is a winning strategy for you in the long run.
Next, what is dollar cost averaging and how does it benefit me in a declining stock market? Dollar cost averaging is when you consistently continue your investments each month regardless of the investment price. The price can be higher or lower, it doesn’t matter because you do it consistently month after month. Dollar cost averaging is the average price of your investment purchases that you have been making each month. For example, if one month the fund costs $15, then another month it declines and only costs $10; your average purchase price in this example is $12.50. Why is this your friend? Because the declining market allows you to accumulate more shares with your automatic investing even if you keep your automatic investment amount the same each month. Please see the following illustration.
Wow, that’s amazing! The lower price resulted in 17 more shares than you would have had at the higher price. As a long-term investor, the additional shares will payoff big over time.
That brings us to the third key point we gain from a down market. It is time. Over time with lower fund prices, we continue to accumulate more and more shares. Although there is no guarantee, historically fund prices tend to move up over time. The higher prices in the future times the additional shares you have accumulated will be a big boost to help you achieve your financial goals. The lower the fund price the more shares you can accumulate from your automatic monthly investing. This, in turn, may result in a higher investment value in the long run if fund prices rebound and move higher over time. This would indeed be a fantastic outcome.
There you have it. A declining stock market no longer needs to be thought of as an enemy or something to fear. As long as you keep investing consistently and have a long-term view, the market can be your friend. Contact Paycheck to Wealth to learn more and to get started on your road to financial success.