Buying The Dip
The stock market has been bumpy the past few days. Of course, by bumpy, I mean, it has been a complete disaster. The NASDAQ officially hit correction territory, and I’ve already seen a few advisors posting online about their clients wanting to sit on the sidelines. I’ve also seen people post online about “buying the dip”, which I believe is another form of market timing.
Allow me to tell you a little story, which I think is helpful in times like these…
I want you to imagine three friends named Terry, Barry, and Sam.
All three invested $200 per month into the S&P 500 from June 1st, 1979, to June 1st, 2019, which means they invested a total of $96,000 each. Yet, after forty years, they all end up with different amounts based on their investment strategies.
Terry is the world’s worst market timer. He saved $200 per month into a savings account getting 3% interest until going all-in at the worst times. For example, he started saving for eight years only to put his money in at the absolute market peak in 1987 before the Black Monday crash.
The good news is that Terry never sold. Instead, he started saving his cash again, only to invest during the next three market peaks.
Even with horrible market timing, Terry did okay. His $96,000 grew to $656,782.
Barry was the opposite of Terry in the sense that Barry was the best market timer in the world. Instead of investing at stock market zeniths, he swooped in at the nadirs.
While waiting, he also saved money in a savings account earning 3% interest. He correctly predicted the four biggest crashes of his investing lifetime and, once invested, he held on. For instance, he went all-in after the 1987 crash, the drop in 1990, the dot-com bubble, and the Great Recession of 2009.
And let me tell you, Barry did way better than Terry…
Because Barry ended up with $946,661.
The stock market has been bumpy the past few days. The NASDAQ officially hit correction territory, and I’ve already seen a few advisors posting online about their clients wanting to sit on the sidelines. I’ve also seen people post online about “buying the dip”, which I believe is another form of market timing.
Allow me to tell you a little story, which I think is helpful in times like these…
I want you to imagine three friends named Terry, Barry, and Sam.
All three invested $200 per month into the S&P 500 from June 1st, 1979, to June 1st, 2019, which means they invested a total of $96,000 each. Yet, after forty years, they all end up with different amounts based on their investment strategies.
Terry is the world’s worst market timer. He saved $200 per month into a savings account getting 3% interest until going all-in at the worst times. For example, he started saving for eight years only to put his money in at the absolute market peak in 1987 before the Black Monday crash.
The good news is that Terry never sold. Instead, he started saving his cash again, only to invest during the next three market peaks.
Even with horrible market timing, Terry did okay. His $96,000 grew to $656,782
Barry was the opposite of Terry in the sense that Barry was the best market timer in the world. Instead of investing at stock market zeniths, he swooped in at the nadirs.
While waiting, he also saved money in a savings account earning 3% interest. He correctly predicted the four biggest crashes of his investing lifetime and, once invested, he held on. For instance, he went all-in after the 1987 crash, the drop in 1990, the dot-com bubble, and the Great Recession of 2009.
And let me tell you, Barry did way better than Terry…
Because Barry ended up with $946,661.
But wait... because Sam smoked them both…
Sam was a slow and steady investor. He didn’t try to time the market whatsoever. He invested $200 per month - EVERY month - into the same S&P 500 index fund.
He invested at every peak and every bottom. He invested during booms and busts. He invested during euphoria and misery.
Sam ended up with $1,371,031.
Slow and steady DOES win the race, in investing and in life.
The big takeaway from Terry’s story is this, don’t sell. Terry is quite literally one of the worst investors you could ever meet. But he had one thing going for him. He never panicked. This is a lesson financial advisors try to teach again and again. We even have lots of cute little phrases about it. How do you get hurt on a roller coaster? You jump off?
In all reality though, you very likely know someone who says they “lost everything in 2008”. They might have. And if they did, I am truly sorry for them. But the simple reality, is the only person who lost everything in 2008, is the person who sold everything in 2009. Had they done what Terry had done, their accounts would have regained their value and much much more by today.
While what Barry did is certainly impressive, it is also almost impossible. The amount of luck that would go into timing those major market moves would be impossible to replicate.
Since none of us really know what tomorrow holds on the market (and by the way, if anyone tells you they do KNOW what is coming, you should turn and run) the best we can do may simply be to follow the advice of Warren Buffet. Invest when everyone else s scared. And sell when everyone else is confident. If you do that, you wont be exact, like our friend Barry, but you will end up with some pretty handsome returns.
Sam interestingly enough employed by far the simplest strategy. In the investing world, what he did is known as dollar cost averaging. What’s pretty neat about Sam, is that his simple strategy paid off big time. Dollar cost averaging plays on the assumption that markets generally go up over time. Because of that, the more money you have in the market, the better you do. That’s why even though he didn’t “buy the dips” like Barry, he ended up ahead. He never had his money parked in the bank doing nothing while he waited for the right moment. He had his money in the market. Earning market returns.
Bottom line, investing can be scary. In fact it can be downright terrifying. But often times the best thing to do, is to try your best to tune it out, don’t panic, and keep investing.