Is there anything better than finding a fabulous new outfit to wear to a special event? But of course, it’s a fabulous outfit on the sale rack at 25 percent off! So, let me ask you this question—would you leave it on the rack and wait for it to go back to full price before you buy it? Or would you snap it up and then buy a pair of shoes to match? OK, this may sound like a silly question with an obvious answer but let me try to add some perspective to the concept of buying into a falling market.
When the market is in a period of decline you may want to think of it as being ‘on sale’ and use it to your advantage. Let’s consider, for example, that you are regularly investing in an IRA or 401(k). At specified intervals, perhaps once or twice a month, you add money into your account and purchase additional shares of the investment XYZ. When the market is climbing XYZ will cost more and, conversely, when the market is falling that same investment will be cheaper. Let’s say you are investing $100 per month and last month your shares were selling for $10—no need to get out the calculator to figure that you will buy 10 shares. This month, let’s assume the market is declining and your investment is now offered at $9 per share. OK, now let’s get out that calculator and we’ll see that your $100 investment will purchase 11.1111 shares. Which would you rather have—10 shares or 11.1111 shares of investment XYZ for the same price? Don’t let volatility keep you out of the market—take advantage of it and invest for your financial future.
The concept of investing on a regular basis without regard to market conditions is known as ‘dollar cost averaging’ and can, over time, reduce market risk. Dollar cost averaging cannot, however, guarantee a profit nor can it protect against a loss in a declining market.
So stay the course, keep investing, and if you hear about a fabulous shop with bargains galore let me know!