The Dow closed at a new high(or at least close) yesterday. Of course this brings out the buzzards with their ever familiar cat calls. “Bubble, Buuuuubbbbllleeee,” They say. If they are traders, they’re selling and maybe even selling short. And there is a slight chance that they are right.
You see, the Dow, just like anything else has cycles. Three years ago, the Dow had sunk pretty far from it’s all-time high. That all time high was reached three years before the bottom was reached. Are you seeing the pattern? Three years. If it follows the pattern, we should see it hit begin to decline and then hit bottom in 2009.
Does that mean sell off all of your stock and hold it in a high interest savings account? Not if you’re a long term investor.
This is where dollar-cost averaging comes into play. As prices decline, you buy more stock. Each time you buy more stock at a price lower than before, your average cost of purchase goes down. In the long run, when the market comes back up, your profit margin on any potential sales goes up with it because of the lower stock purchase price.
So, don’t run from a declining market. Run towards it and begin buying.
I feel that I should mention that I’m not a trained finance professional and that any advice found here should be double checked with a financial professional before you do anything.
[tags]stocks, dow, dow jones, stock, dollar-cost averaging[/tags]
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I don’t know whether anyone is maintaining this site anymore, but I enjoyed reading the above post here in March 2009.
I like this line:
“Does that mean sell off all of your stock and hold it in a high interest savings account? Not if you’re a long term investor.”
I did that in 2001 and have been called a fool for it. I did it because I had held losing stocks before. Even in a climbing market, their recovery was painfully slow. After losing 50% it took some of them 7 years to get back to their initial value. If you drop 50% you have to gain 100% to get back where you started. I decided that it was better to hedge against the possibility of a drop and take the best interest-paying investments I could find.
I think my strategy was the correct one, given where we are in 2009. It’s the one the Chinese have employed, to their advantage. Save yourself rich:
1. Put most of your money in 3-5 year securities. Don’t let an “investment advisor” tease you with sure thing mutual funds. Heed the advice about past performance being no guarantee of future gains. My 401K mutual funds show gains going back 10 years, but they are not static. A year ago most funds showed 10 year yields of 10%+ – now they are all negative 3-5%. The gains are only real if you capitalize them.
2. Never invest money in the stock market that you can’t afford to lose. If you can’t afford to lose your retirement, it shouldn’t be invested in the stock market.
3. Save every penny you possibly can. I thought that that was the point of this site, until I read this article…
4. Buy local as much as you can. If you don’t, there won’t be any local economy. If there’s no local economy, who’ll buy your house when you need to sell it?
5. If you’re in the market, and you make some money, capitalize your gain. Unless you’re in it just for the dividends, you’re gambling when you play the market. In order to make money gambling you can’t get caught up in the game and forget to pocket your winnings. Lots of people, egged on by financial touts, got caught up in the game and stayed “fully invested”. They should have booked their 15% annual gains into CD’s, instead of losing both their gains AND their stake.