We discuss dollar cost averaging frequently. We often cite if you dollar cost averaged $1,000 per year through the Great Depression, you could have a 7% return versus investing $10,000 all at once.
According to a study released by the Employee Benefit Research Institute and the Investment Company Institute, of those who participated in their 401(k) plans consistently throughout the five year period ending Dec. 31, 2012, saw account balances grow by a compound average annual rate of 6.8%. We feel it is important to note the study doesn’t include 2013, which was a 30% up year for the markets. Over the analyzed period, the average account balance for consistent 401(k) plan participants grew from $77,049 to $107,053 by year end 2012.
We have always maintained investors should stay invested and not make decisions based on fear of losses. Volatility will happen for various reasons not connected to the market. We don’t know what will spur the next sell off. It could be fear of Ebola or unrest in the Middle East. Regardless, we are due for a pull back. However, if you do not need the money within the next 10 years, what do you care what the market does today?
We believe you should make sure your investments are appropriate for your goals. You do need to spend the time to research your expenses, look for dividend-paying stocks, and seek high quality. You also need to watch your stocks. Investors cannot buy and then forget the investment. Likewise, if it falls 10% and there is nothing fundamentally wrong with the company, you do not need to sell. On a couple occasions, Apple Inc. (NASDAQ: AAPL) has fallen 25% in the last six years and recovered.
News drives volatility in the market. Humans are generally bad at predicting the future. However, as an investor, you can watch company earnings. While past performance is not indicative of future performance, you can see over history where a company’s trend is heading.
The 1970s were a difficult decade with a market that didn’t do much, an oil embargo and high inflation. If you were to superimpose the market’s performance on the 2000s, you would see a very similar pattern. We also tend to see sell offs in late September and October.
We believe if you buy good quality stocks and stick to your investment discipline, you should be fine. If you missed 40 of the best months out of 1926-2013 your return would be barely better than cash; therefore, we believe it is important to stay invested, and not try to time the market.
If you have questions regarding your investment strategy, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures