Investing At Bargain Bin Prices

Why rollercoaster markets are good for your investments

from daveramsey.com on 03 Aug 2010
 

Even those of us who enjoy the thrill of a good rollercoaster ride have found it difficult to appreciate the stock market ride of the last couple of years. The ride scared many investors, and now the click, click, click of the ride back up—which should be the best part—fills them with dread as they anticipate the next drop.

Huge Potential At Bargain Prices

Pinpointing the next stock market slide is impossible and irrelevant, according to Jeff Dobyns, Endorsed Local Provider of investment services in Nashville, Tenn. Instead of watching for signs of a slump, he suggests you look for investment bargains.

“The latest market decline should only matter to investors because prices are lower—significantly cheaper than they were one or two years ago and probably cheaper than they will be in the future,” Dobyns said.

Over the last 10 years, the S&P 500 has averaged a negative annual return. Dobyns said, based on the history of the S&P 500, that means the market could be poised for a period of growth.

Since 1928, there have been nine 10-year periods where S&P 500 returns were less than 5%. Each time, the following 10-year periods averaged 13% returns each year—sometimes as high as 18% each year.

The last 10-year period in which the S&P produced returns under 5% was 1969-1978 when it averaged 3%. In the next 10-year period, 1979-1988, it averaged 16% annually.

“Of course, there’s no guarantee for that, but those who invest now could be in a position to make more than at any other time in history,” Dobyns said.

In A Perfect World

Dobyns understands that nervous investors want to see more signs of recovery in the economy as a whole—but that could be a costly mistake.

You can’t wait for the world to be perfect,” he said. “People who are waiting for employment and other indicators to improve are going to miss a great opportunity.

“They’ve already missed a 60% run-up since the market began its rally in March ‘09 ,” he added.

History backs Dobyns on this point as well. Missing just 10 of the most profitable days in the S&P 500 from 1989-2008 would have reduced your annual return by 3.5%. Missing the best 30 days would knock off 7.8%.

Successful investing depends more on you than the market. Focus on the long-term with good mutual funds, and keep your emotions out of your investment decisions. And don’t forget the importance of working with a trusted advisor who will walk you through the tough times.

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