Louise the Loser
Meet Louise- she is a loser. She always pays too much for cars, loses her Kohls Cash Coupons, picks bad boyfriends, and hasn't asked for a raise in years. SIGH. She also has managed to invest her money in the stock market every year at the worst possible time, whenever the stock market was at a high. So why is she smiling? Because she is in it for the long haul and her money has grown, despite her terrible timing. Let's say she started buying the SPY, which is an exchange traded fund that invests in the largest 500 companies in the United States. And she invests $10,000 in October 2007, which turns out to be the market high right before the great recession. Then the following year she put $10,000 in January. By the end of that year, her $20,000 is now only $13,858. What a loser. Louise considers selling but decides to ride it out. She puts another $10,000 in December of 2009 when the DOW had recovered to over 10,000 after plummeting to 7,000 in March-she kicks herself for not having the courage to buy at the low. She continues to do this until last year. Her $100,000 invested over ten years is now over $222,000 for an average return of 12.44%. Not too bad for having the worst possible timing.
Of course, life can get in the way of investing. Job loss, medical problems, car problems etc. Which is why we only put money in the stock market that can be set aside for many years. A well balanced financial plan is important to success. And I know what some of you (the engineers of the group) are thinking- What if Louise wasn't a loser but Wilma the Winner? What if she had managed to buy on the best day of the year, the market low? Yes, Wilma would have more money. In fact, her $100,000 investment would have grown to $265,000 for about a 14.5% average return. Not bad! But for all her perfect timing, she is only $45,000 better than the loser. The reality is, you will probably never be that consistently bad or good, but if you apply discipline and take fear and greed out of the equation, you should end up okay. When we get into rocky stock markets, people start to lose their heads and panic. What what we are experiencing is normal. We WILL have another recession. I just don't know if it is this year, next year, or the year after. What you can do now is, keep personal debt low. Keep saving for retirement. If you are in retirement, make sure you have enough reserves to ride out a year of market volatility. If you are less than five years from retirement, consider re-balancing your retirement accounts to be more conservative.