In 2017, the S&P 500 had only 4 trading days where it moved +/- 1%. All four of those moves greater than 1% were to the downside. Of the 251 trading days in that year, 113 days were negative returns from the open to the close.
That means 45% of the trading days in 2017 were negative, while 55% of the trading days were flat (one day) or positive.
With that information, what would you assume the return for 2017 would be?
If you guessed up 21% you would be correct!
Most years aren't like 2017. They are more like 2019 and (so far) 2020. Volatile, moving up and down. In fact, JP Morgan publishes in their Guide to the Markets each quarter, that the average draw down (correction or pullback) in a given year is just north of 13%. That means, in a given year, your should expect your account to be down about 13%. Investing is fun, right?!
A few points on that...
- Most people, when they invest, don't invest 100% in equities. They don't do that because human emotion cannot handle drastic swings in account balances. Think of this: If you had $1M in your portfolio, on average every year your portfolio would drop by over $100,000! Not many people are going to stay confidently invested if that occurs, especially if their only investment knowledge is from financial entertainers, journalists, and CNBC headlines.
- Take advantage of dollar-cost-averaging. This is a key, and the whole point of this article. Whether you realize it or not, every single month you receive your paycheck (or every other week), you are dollar-cost-averaging (DCA) into your retirement account. This simply means making regular, systematic contributions of a certain dollar amount each and every month.
- With this investment approach, you are able to take advantage of price fluctuations (as we saw above are common) over time. If you contribute $100 per month into the market, and you buy a fund priced at $10 per share, that means you have bought 10 shares ($100 invested / $10 share price = 10 shares bought). If next month, that fund is worth $20 per share, that means you only purchase 5 shares that month (you buy less at higher prices). If the month after that, the fund drops to $5 per share, you would then purchase 20 shares (you buy more at lower prices).
When investing over time, the data shows consistently that this is one of the best ways to take advantage of price fluctuations. No matter what pundits say or what you read online, no one can time the market. After all, they have to be right not once, but twice - when they buy, but also when they sell - and no one consistently has been able to do that over a long period of time (even though it is so enticing to think we can).
If you are jumping in to the world of investing, the first thing to remember is have a plan. No matter who you are, your plan should consist of dollar-cost-averaging. That is the smart way to not fall into the trap of trying to time the market, and making emotional decisions that trap people over time (go read about all the day traders that lost truck loads of money in the 2000s).
Do you have any questions, or want to learn more? Please reach out to me at firstname.lastname@example.org or check out more info on www.mblakemiller.com and I'd be happy to chat!