Stocks as an asset class can go into long term secular declines. Look at Japan. Or the US post Depression and 1966-thru 1970s.

Following conventional wisdom can get an investor truly burned—while big institutions who market funds collect their fees.

You have to take the loss, because you have to survive. None of the examples talk to this reality. Just ask me, or the folks at Citi.

Stocks are not the only investment out there, other things do go up in value and it can also be wise to hold cash in such rough times.

My biggest concern in this is for those who blindly keep it all in the stock market “because it will come back,” rather than considering other options. They could easily end up loosing a whole lot more.

Hopefully this places my remarks in context. I am not meaning to start a debate here. I just don’t share the same long term excitement for stocks as some. For better or worse, I can get a whole lot better personal return by paying debt down. :/

Brad

It assumes things will go up enough, in a reasonable time frame, to regain the losses and then go farther.

We have had historically high returns for many years. It is highly likley we will have historically low returns (or losses) to “return to the mean”. That does not paint as pretty of a picture.

Note your last statement “wait for the market to recover.” If you had your money in the NASDAQ stock index in 2000 (or whenever it was that crashed), you would still be waiting for it to return to where you were. I think it remained down 50% even before the recent troubles.

Which makes my point. If you had “dollar cost averaged,” on that, you would still be way down. Stocks are not necessarily a good deal with what we are highly likely to face in the next few years, even with such “tricks”.

IBrad

In my example, I specified that you bought in at $100, and that the period in question ended at $100. So over that period, the market as a whole was flat. Yes, it rose from $66.50, but it also fell to $66.50 before that (actually, it bottomed at $50, but I assumed that you didn’t have perfect timing). Nothing about my example is broken — you nailed it on the head.

If you sit tight and do nothing, you have to wait for the market as a whole to recover. If you sell, you lock in your losses. But… If you continue investing through down periods, that “new” money will go into the market at a relative low point, and will generate positive returns while the “old” money is still struggling to get back to even.

That breaks the example since the example requires that the second two investments get a 50% gain ($66.50 to $100 per share). At that rate, people would be pooring money into the market, but it is not doing that.

Regular investing pays dividends in ’some’ types of market turmoil.

Take the real-world example of an S&P 500 Index Fund over the last 3 years — and your advice would have caused an investor to lose a third of his money.

Obviously, there are other significant factors to be considered besides mere ‘regular’ investing.

Regularly buying winning Lottery tickets is also a profitable investment approach — but it’s a bit more difficult in practice than in general principle.

Shares start at $100, go up 50% in value, then drop back to the original value with 18 months to get to the top and 18 months to get to the bottom just like your example.

Original investment: $10,000 @ $100/share = 100 shares
Year one investment: $10,000 @ $133.33/share = 75 shares
Year two investment: $10,000 @ $133.33/share = 75 shares

At the end of the period that is $25,000, so you have lost $5000 (20%) while the market has gone nowhere.

My point is it cuts both ways with constant investing…