With the media sounding the alarm that there may be a double-dip recession, the downgrading of the U.S. credit rating and the dismal economic forecast for many European markets, it looks like many investors are becoming gun-shy, to say the least, or they are losing faith in the stock market completely. You can see evidence of this daily by listening to the news and watching the rollercoaster of results on Wall Street.
Would you believe that volatile times like these are actually a great opportunity? Let’s say you are investing a set amount of money every month. When the market goes down you will buy more shares with that money. When the market comes back up you will buy fewer shares, but now all of the shares, even the extra shares you bought at the lower price have gone up–that’s called dollar cost averaging. By following this strategy your money can compound even in a volatile market.
Let’s take a lesson from recent history. The stock market can plunge or soar with a moment’s notice, leaving no time to bolt. Likewise, the healing power of the market often arrives when you least expect it. This is one thing that you can be sure of–the market will go up and the market will go down in unpredictable ways. But, as Warren Buffet said, it always comes back. In early 2009, after stocks had fallen more than 50 percent, many investors and fund managers were terrified, but then the market surprised everyone, soaring 100 percent in just a few months and healing a lot of the damage caused by the crash.
Now let’s insert some simple numbers into this scenario. A person who had about $10,000 in the stock market before the crash would have had less than $5,000 at the worst point in April 2009. But if he had left it alone he would have about $9,000 by now, while, if he had yanked it out at $5,000 and put it in a savings account, he would be lucky to have $5,100 today.
Obviously, there are many variables to consider: your risk tolerance, your time horizon, your goals, your investment allocations, etc. However, the fact is that if you pull out your money at a low point in the market, you are guaranteed to lose. By riding out the waves in the stock market and taking advantage of dollar cost averaging, it is very possible not only to recoup losses, but also to amass a nice return on investment over time.
Do not let the fact that there is a lot of negativity out there scare you out of the market. Take all of the factors relating to your financial situation into consideration and make an informed decision instead of an emotional one.
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David Vogelsang makes weekly posts to his blog titled “Spreading Financial Confidence…One Post at a Time.” For more information, please visit http://dvogelsang.blogspot.com/.