After months of campaign ads and candidate debates, we have a winner. In January, a new president will be sworn in to the Oval Office.
No matter how you feel about the outcome, one thing’s for sure: With change comes uncertainty—and uncertainty has a funny way of making the market waver. Investors have already experienced a fair share of ups and downs this year, and that volatility isn’t expected to go away anytime soon.
So how do you keep market jitters to a minimum if the market does swing down? Let’s look at one big reason a downturn shouldn’t scare you.
The Bulls and the Bears
For the last several years, we’ve seen an upward cycle, or a bull market, with stocks growing 76% in the last five years. That’s been awesome for retirement accounts!
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But one of the stock-market facts of life is that what goes up will eventually come down. For long-term investors like you, a downturn, or bear market, is a reason to be alert—but it’s not a reason to be alarmed.The fact is, your retirement account can get a huge boost from a bear market with a simple strategy you’re probably already using: dollar cost averaging (DCA).
If you invest a portion of your paycheck in your 401(k), you’re already a DCA pro because you’re investing the same amount at regular intervals. That’s all DCA is—systematic investing.
How to Make the Most of a Down Market With DCA
To see how DCA works in a declining market, we have to go all the way back to the scary days of 2008–09. We tracked the values of an S&P 500 index mutual fund for one year starting in September 2008 to see what would happen if you’d invested $500 on the first business day of each month.
As mutual fund values dropped, your $500 bought more and more shares. By the end of that 12-month period, you’d have ended up with a total of 440 shares at an average price per share of less than $14.
Since then, those 440 shares have grown in value. You paid a total of $6,000 for them, but they're now worth $34 each—a total of $14,960! That's nearly 150% growth!
By purchasing shares as the values drop, you lower your average price per share. That minimizes the impact of your losses and maximizes your potential for growth. If you'd panicked and stopped investing in January when the market rebounded slightly, your average price per share would have been much higher—more than $15. Plus, you'd have fewer shares to take advantage of the rebound. In that scenario, the 163 shares you bought for a total of $2,500 would be worth just $5,540 today—slightly more than double.
Prepare Today for Whatever Comes Next
With a DCA investing strategy, you're well on your way to making the most of a down market—whenever it happens. To truly capitalize on the opportunity, you'll need to make sure you're investing in growth stock mutual funds that have come out on top during previous market cycles.
Your investing professional can review your investments with you and help you make any necessary changes now so you'll be in a great position to take advantage of whatever the stock market has in store.