If I told you to celebrate when the market goes down -- you might think I am crazy!
Psychologically, nothing is more depressing then seeing your investments go down the drain, but if you invest regularly and have some time before retirement, bear markets can be a beautiful thing.
Every historical study that I have ever seen shows that the stock market has an upward bias, meaning in the long-term we can expect positive returns despite a few bad years here and there. When the market goes down, you essentially get a better price on the funds or stocks that you are buying. For an investor who continues to invest in the market, this can be very beneficial. Don't just take my word for it, let me show you proof.
Steady Growth vs. Down Market Followed By Recovery
The comparison chart shown above in the right-hand corner of this page contains two scenarios: The purple line shows a steady upward market and the orange line shows a market that declines for four years, but recovers and grows well for eight years. Both scenarios start with a fund price of $20 and end with a fund price of $44.43 over the 12 year period.
If you are in retirement, then you prefer the purple line because you are living off your retirement and want the highest share price when you sell your funds. If you are a younger investor, then you prefer the orange line because are constantly investing and you get to enjoy lower prices when the market dips.
Assuming you are constantly investing the same amount in both scenarios, the steady growth scenario (purple line) ends up paying an average of $30.64 per share, but the down market with recovery scenario (orange line) ends up only paying an average of $22.56 per share.
Taking the average is nice, but lets put some money on the line. If we put $1,000 per quarter into each scenario, here's what happens:
Steady Growth
Shares Owned: 1,655
Portfolio Value: $73,544
Down Market With Recovery
Shares Owned: 2,427
Portfolio Value: $107,809
If you would like to see the full study, click here.
The results are very telling, but what about a case where someone already has a decent amount of fund holdings? I redid the same study, but assumed that the investor already had 1,000 shares (or $20,000 worth). Here is the end result:
Steady Growth
Shares Owned: 2,655
Portfolio Value: $117,978
Down Market With Recovery
Shares Owned: 3,427
Portfolio Value: $152,283
As you have learned from my examples, down markets can be wonderful for investors who have the discipline to keep investing. Low share prices mean more shares and when those shares eventually go up in price, you will be one happy investor.
