August 12, 2009

Money-Guy 08-12-2009

So here we find ourselves. I won’t go so far as to say that things feel good, but at least it doesn’t appear as though the sky is falling any longer. Will we remain at this “comfortable” level? I’m not sure and I don’t think that anyone knows for sure. What I do believe, however, is that we have made it through the worst of it. While I can’t be positive, I am inclined to suggest that the Dow will not (I say this with fingers crossed) slide back down to that dreadful 6500 level.

I had a meeting with one of my younger clients last week and I explained to him that I did feel we were through the worst part of this mess. Being a younger client, I had previously explained the specific benefits of Dollar Cost Averaging and, in addition to their employer sponsored retirement plans, began a periodic investment program for he and his wife. Thankfully, the two of them stayed disciplined and committed through all of the nastiness. Even through October, November, February, and March they continued with their periodic investment plan.

Now that the smoke has begun to clear, he explained that many of his friends had completely cut-off their monthly investments. He explained that they had reached a point where they basically couldn’t handle it anymore. In the investment world, we call this capitulation. He then asked me a great question. He said, “Brian, it was hard for my wife and I to stay the course, but we did. Is there any way you can show me how those specific investments have done over this crazy period in the market?”

I thought this was such a great question that Bo and I have decided to create a research document for the Premium section in which we show the benefit of staying the course through the worst of times. As you listen to the show I share some performance of periodic investments in a large cap growth mutual fund for a younger individual, a moderate balanced fund for an older individual, and then even a simplified asset allocation fund for a middle-of-the-road investor.

In the very darkest of times (the first part of March), investments made in September into each of the three funds explained above  were down 34.18%, 25.93%, and 29.31% respectively. If you weren’t investing over this period, try to take a step back and ask yourself how it would feel to know that an investment you had made no more than 6 months earlier had lost a third of its value. This is the point at which many people (the peers of my client) decided they were done with this whole stock market and investing thing.

But, for those educated and disciplined individuals like my client who stayed the course, they now have a chance to look back and see how beneficial that decision was. Periodic contributions made in March in the funds above have now returned 32.18%, 24.29%, and 46.31% respectively. Those are outstanding returns for a 5 month period!

“But Brian, you cherry-picked two days. It was bad for months! How did those individuals do over that whole time period when the sky was falling?”. That is a great question and I’m glad you asked! In just one year (from September 2008 to now), these three individuals on a periodic investing plan that stayed the course and didn’t try to time the markets have experienced an overall return of 11.11%, 8.4%, and 14.06%. If you ask me, I think those numbers speak for themselves as to whether it was a good idea to make that tough decision and, even when it wasn’t easy to do, stick to the original plan! As Dave Ramsey says, “Live like no one else so that you can live like no one else”.



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