How To Get A Head Start On New Bull
Enviado: 16/7/2003 18:31Investor's Business Daily
How To Get A Head Start On New Bull
Wednesday July 16, 9:25 am ET
By Paul Katzeff
How important is it to keep your money in the stock market? If you don't, you stand to miss the full lift of any sustained rally.
How much better would you make out, then, by not only staying in, but also doubling your monthly investment once the market had tumbled, say, 30%?
It's not that risky. The market seldom falls much further.
Since World War II, bear markets have taken down the S&P 500 index 32% on average, says Standard & Poor's. And the index fell more than 30% in only four of the 10 bears.
So typically the worst is already over if you double up at a 30% loss.
And the market has always rebounded. The average postwar bull market - before the current one - saw the S&P 500 soar 155%.
Doubling up would have put you ahead of a strategy of regular investments despite the recent bear market, when the benchmark fell 49% from its March 24, 2000, peak.
That day, the S&P 500 index closed at 1527.45. A 30% loss would have been to 1087.42. But the index didn't close below that until Sept. 17, 2001, when it stopped at 1038.77.
After that, the market stayed in a funk about another year and a half.
But suppose you'd invested $100 the first of each month. Then imagine you'd doubled that investment once the market had tumbled that 30%.
Your first chance to invest $200 would have been Oct. 1, 2001.
The outcome of that aggressive strategy? You would have lost your shirt, right? After all, the S&P 500 continued to fall from Sept. 17, 2001, through June 30, 2003.
But in fact you would have made out better by doubling up. How's that possible? The result is due to the compounding of your dollar-weighted investments: You had more dollars at work as the market eventually heated up.
Look at what would have happened if you had put that money to work in a real stock fund, $77.2 billion Vanguard 500 IndexFund.
The fund lost a total of 22.57% from March 1, 2000, through Sept. 17, 2001. On an average annual basis, that was a 15.21% loss.
Between market action and monthly contributions, your account would be worth $1,499.54 by Oct. 1, 2001.
If you began to invest $200 a month after that, by June 30, 2003, your account would hold $5,715.77. True, that's 6.2% below your total investment of $6,100. But you'd still be better off than with a steady $100 monthly plan.
If you stuck with a $100 monthly contribution and put the second $100 into a pile on your night stand, your account plus your cash would total $5,679.53, or 6.8% below your investment plus cash.
So you'd have $36.24 more in your double-up account due to earnings.
At times during the bear, your night-stand strategy would've had you ahead - as much as $264 after 12 months. The double-up plan would be mauled as the bear neared its deepest trough.
But doubling up would outperform over the final four months of the period, surging ahead in dollar-account size in May and June.
That's because you have more money in play as the market rallies. In Q2 2003 alone, the Vanguard 500 gained 15.39%. From Oct. 1, 2002, through June 30 it gained 21.08%.
By having ever more dollars invested as the market rebounded, compounding would boost your gains. The night-stand strategy lets only half as much cash compound.
Even if, monthly, you had put the second $100 into a money market fund, doubling up in a stock fund would win. Money market rates have been too low, says iMoneyNet.
How To Get A Head Start On New Bull
Wednesday July 16, 9:25 am ET
By Paul Katzeff
How important is it to keep your money in the stock market? If you don't, you stand to miss the full lift of any sustained rally.
How much better would you make out, then, by not only staying in, but also doubling your monthly investment once the market had tumbled, say, 30%?
It's not that risky. The market seldom falls much further.
Since World War II, bear markets have taken down the S&P 500 index 32% on average, says Standard & Poor's. And the index fell more than 30% in only four of the 10 bears.
So typically the worst is already over if you double up at a 30% loss.
And the market has always rebounded. The average postwar bull market - before the current one - saw the S&P 500 soar 155%.
Doubling up would have put you ahead of a strategy of regular investments despite the recent bear market, when the benchmark fell 49% from its March 24, 2000, peak.
That day, the S&P 500 index closed at 1527.45. A 30% loss would have been to 1087.42. But the index didn't close below that until Sept. 17, 2001, when it stopped at 1038.77.
After that, the market stayed in a funk about another year and a half.
But suppose you'd invested $100 the first of each month. Then imagine you'd doubled that investment once the market had tumbled that 30%.
Your first chance to invest $200 would have been Oct. 1, 2001.
The outcome of that aggressive strategy? You would have lost your shirt, right? After all, the S&P 500 continued to fall from Sept. 17, 2001, through June 30, 2003.
But in fact you would have made out better by doubling up. How's that possible? The result is due to the compounding of your dollar-weighted investments: You had more dollars at work as the market eventually heated up.
Look at what would have happened if you had put that money to work in a real stock fund, $77.2 billion Vanguard 500 IndexFund.
The fund lost a total of 22.57% from March 1, 2000, through Sept. 17, 2001. On an average annual basis, that was a 15.21% loss.
Between market action and monthly contributions, your account would be worth $1,499.54 by Oct. 1, 2001.
If you began to invest $200 a month after that, by June 30, 2003, your account would hold $5,715.77. True, that's 6.2% below your total investment of $6,100. But you'd still be better off than with a steady $100 monthly plan.
If you stuck with a $100 monthly contribution and put the second $100 into a pile on your night stand, your account plus your cash would total $5,679.53, or 6.8% below your investment plus cash.
So you'd have $36.24 more in your double-up account due to earnings.
At times during the bear, your night-stand strategy would've had you ahead - as much as $264 after 12 months. The double-up plan would be mauled as the bear neared its deepest trough.
But doubling up would outperform over the final four months of the period, surging ahead in dollar-account size in May and June.
That's because you have more money in play as the market rallies. In Q2 2003 alone, the Vanguard 500 gained 15.39%. From Oct. 1, 2002, through June 30 it gained 21.08%.
By having ever more dollars invested as the market rebounded, compounding would boost your gains. The night-stand strategy lets only half as much cash compound.
Even if, monthly, you had put the second $100 into a money market fund, doubling up in a stock fund would win. Money market rates have been too low, says iMoneyNet.