A Bear Market is Your Friend
November 07, 2011A friend of mine posted this comment on Facebook last week “Yeah! The market is up 345 points! Finally it is going in the right direction.” Well, I was NOT happy at all to hear this news. You see, that day (Thursday October 27th) was the day our company made its annual contribution for all of our employees – the employer matching contributions to everyone’s 401(k). I was certainly happy to receive a company contribution but not so happy about the timing. Because mutual funds pick up the end of day pricing, that means everyone in our company received a contribution to their 401(k) AFTER the market went up that day. If the contribution had been made a day earlier, all of us who invest in stock funds would have been over three percent richer.
Three percent won’t make or break anyone’s retirement plans, but the bad timing of this market gain illustrates a point —don’t wait for good news to invest! Well, at least for the long term investor. A long term investor actually wants a down market so they can buy when everyone else is selling and can pick up “value” stocks that are temporarily out of favor. What would be ideal is for stock prices to stay down for years as we make our monthly contributions to the 401(k) in stock funds (and the company makes their annual contribution), and then suddenly shoot sky high the year before we are about to retire. That would be some retirement party! What perfect timing to quadruple our money right before retirement.
The possibility of this happening is a fantasy, of course, and actually wouldn’t be good for the country because there would be other consequences that come with the down market, including low consumer confidence, high unemployment and millions of Americans delaying retirement, to name a few. But on the other hand, it opens our eyes to the fact that even though we haven’t seen it lately, markets do rebound and our economy won’t always be sluggish.
Long term investors waiting for some kind of turn around, like my friend who was excited to post on Facebook that the market is up, may actually be hurting themselves in the long run by investing in money market accounts and cash accounts today. It’s not like the money market is doing anything for us now anyways! Interest rates in money market accounts are less than half a percent today and if you don’t need the money in the next five years, why not “buy low” now and accumulate shares that will eventually go up.
What may feel “safe” today, may hurt later. According to the latest Dalbar study, the S&P earned a little over 9% while the bond index earned less than 7% over the 20-yr period ending last year. The study goes on to say the average equity investor actually earned less than 4% over that same 20-yr period. That’s largely because of the tendency of investors to jump into the market when it’s up, bail out when it’s low, and eventually miss the recovery.
That is exactly what happened to some investors during the recent market downturn. A recent study by Fidelity reported investors who moved to cash accounts during the market drop in 2008 and 2009 earned 2%, but the investors who stayed in and stuck with their long term strategy, earned 50%. The investors who had faith in their plan and stuck to their strategy though it was pretty frightening at the time, made out.
Remember a bear market can be scary, but that bears do hibernate! I’d love to see someone post of Facebook, “I am so excited the market dropped 300 points so I invested a boatload for my retirement twenty years from now. Going out to celebrate tonight.”