Have you ever wondered what is the best way to navigate a volatile financial market? It’s been a crazy ride here the last 10 days and it looks like we’re in for more roller coaster action in the coming weeks. Here after the market has closed today, the DOW has dropped 5,676 points since the beginning of the day on March 6th. I know this has a lot of people concerned, and I’m not attempting to instill any additional fear in people. Instead I’d like to shed some light (from an educational perspective and not an advising perspective) on some timeless principles that some of the best investors have implemented over time.
Have you ever heard of Dollar Cost Averaging? The Oracle of Omaha (Aka Warren Buffet) is one of the most respected investors of our times. He has a philosophy called Dollar Cost Averaging which is essentially contributing a fixed amount of money into your investments each month, regardless of if the market is up or down. If you contribute over time you will overcome any pitfalls and come out on top in the long haul.
Most importantly with this theory, it takes the emotions out of it! Trying to time the market to perfection is a difficult concept for maximizing profits, but it is even tougher on your emotional state during the process. Unfortunately, many people act on emotions and not logic. Dollar Cost Averaging takes that human weakness out of the equation to maximize your long-term investments.
Now I hope I can offer some additional advice without being hypocritical of the above 3 paragraphs. And this thought is a page right out of many of the top business and finance leaders’ playbooks. You should always prepare financially for times like this when markets are down, and opportunities are available. Many of you reading this will probably think that “preparing financially” means having a diversified portfolio. While I do recommend that, in this case I am talking about having some liquid assets on hand to invest while things are on the cheaper side.
One key to long-term financial wealth is being in a position to take advantage of buying opportunities. Whether it was in 2008 when real estate prices dropped and foreclosures were at an all-time high, or when the stock markets have bottomed out and stocks were almost sure to bounce back. Anytime a market is in a recession if you have cash on hand to buy assets when they are low, that is your best bet, and the only exception (or even enhancement) to the Dollar Cost Averaging theory!
Now you never know what to expect with the market and even how things will look 10,20,30+ years in the future. But here’s a perfect example. In November of 2007 the stock market reached 13,924, and within 15 months in March of 2009 the market bottomed out at 6,469. Anyone who had liquid funds to invest at that point would have at least doubled their money within the following 2-3 years. The 2nd example in these numbers is even if you would have been investing when the market was at its peak in November of 2007, if you left your money in the market over the last 12.5 years, you still would have doubled your money over time. But think about how much money you would have made if you were investing $200 a month throughout the last 12.5 years, regardless of how the market was doing. You’d have gotten a lot more for your money during those really low periods and amplified your return 300-400% over the last 12.5 years. See the illustration below on how Dollar Cost Averaging can be a smart long-term philosophy.
Credit to moneyredpill.com for the infographic.
However this volatile market is affecting you, we will get through it, It’s All Good!
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