I’m a big proponent of dollar-cost-averaging and sticking with your investment strategy no matter what happens in the market short-term. If you strategy is truly a strategy, not a tactic, it will be relevant and applicable no matter what happens in the stock market.
There was some research posted on Business Insider that shows what would happen to your portfolio if you missed a certain number of the biggest stock market gains since January 1, 1980 (a period of approximately 33 years).
They referenced a chart from Fidelity that illustrates the impact of not being invested during the largest gains in the market.
In this case, if you would have kept your $10,000 initial investment in the market every day, you would have reached a balance of $332,502. Missing the 5 best days in the market would have lowered your balance $77,000 to $215,273. Missing the 50 best days would have lowered your balance to $29,327.
So, when the market gets scary… don’t ask yourself “should I sell?” because you are afraid of what is happening. Ask yourself “does my portfolio match my investment strategy?” or “is my investment strategy updated to my current risk tolerance, time horizon, and/or goals?”
Many times, when the market drops, people are looking to sell as the market approaches the bottom. This is strong indication that their portfolio did not match their risk tolerance and their goals. People’s risk tolerance is really high when the market is headed up, but when the market drops, that is when people’s resolve is tested.
For those who sold in early 2009 as the height of the financial crisis was upon us, they did so as the Dow was at 6,627 on March 2. We are almost at the 4 year anniversary of that point, and the Dow is now at 14,001… just a few points shy of the all-time high of 14,093 on October 8, 2007.
Written a different way… the Dow has more than doubled in almost exactly 4 years.
If you stayed the course with your investment strategy, and continued to invest through regular 401(k) paycheck deductions and annual IRA contributions… not only would your investments be back near their peak value, you would have continued to dollar-cost-average and buy shares as the market bottomed, so you would have made a profit on your contributions the last 4 years.
For those of you who followed this guidance, I applaud you. For those who didn’t, this will not be the last time that the stock market takes a major dip. Learn the lessons and hold true to your strategy. For both of you, take this opportunity to re-evaluate your strategy, adjust accordingly, and tweak your portfolio to ensure that it matches your strategy so you can sleep comfortably, no matter what happens in the market.