This example is appropriate for the current climate:

Investor A and Investor B both decide to invest $100 a month for a year - no matter what. They pick different investments, but both having an initial share price of $6 per share.

Investor A's investment proceeds smoothly upward all year long until it closes the year at $16 per share.

Investor B's investment drops continuously for the first 6 months of the year, all the way down to $1.50 per share. It then recovers by the end of the year, but only back to the original $6 per share.

Who ends up with more money?

The answer is Investor B with his doggy investment that started at 6 bucks, lost a ton of money then recovered only back to what he bought it for. Intuitively, we'd think he broke even, but his investment was actually worth $2,249.09 for an annualized rate of return of 87.42%. Investor A, who we'd all like to be, and his continuously upward-trending investment ends the year with $1,859.06, an annualized rate of return of 54.92%.

This is an example of the power of "dollar cost averaging" which is a phenomenon that happens when you invest a fixed amount on a recurring basis - your average share price is driven down and you end up with more shares. When the price is down, you buy lots of shares. When the price is up, your $100 buys fewer shares. As shown above, lots of cheap shares is better when things turn around. Much better.

Yeah, that's how a lot of company stock purchase programs get the best of you. Its best to put more in when the prices aren't so high, and slow down when the prices get up there.

You missed the point by just a hair: the relentless investment of a set amount of money automatically does what you describe.

Let's say for example, I invest $100/month as the price swings up and down. I buy 10 shares when the price is $10/share; 20 shares when the price is $5/share; 2 shares if it goes up to $50; etc.

The average share price in this example is: 10+5+50/3= $21.67/share.
I have purchased: 10+20+2=32 shares
I have paid: 3x100 = $300
My average cost is: 300/32= $9.38/share.

So, dollar cost averaging causes me to buy more shares when the price is low, fewer at a high price. This drives my average cost per share down and also causes me to end up with more shares. Mutual funds pay dividends and capitol gains on a "per share" basis, so I win again as dividends get paid out and re-invested.

I bring all this up to show the futility of jumping out of the market, waiting for it to come back to where it was when you jumped out, then jumping back in. Aside from the fact that no one knows where either of those points is, you miss out on the huge return on the money you should have been investing all through the dip and recovery.

You missed the point by just a hair: the relentless investment of a set amount of money automatically does what you describe.

Let's say for example, I invest $100/month as the price swings up and down. I buy 10 shares when the price is $10/share; 20 shares when the price is $5/share; 2 shares if it goes up to $50; etc.

The average share price in this example is: 10+5+50/3= $21.67/share.
I have purchased: 10+20+2=32 shares
I have paid: 3x100 = $300
My average cost is: 300/32= $9.38/share.

So, dollar cost averaging causes me to buy more shares when the price is low, fewer at a high price. This drives my average cost per share down and also causes me to end up with more shares. Mutual funds pay dividends and capitol gains on a "per share" basis, so I win again as dividends get paid out and re-invested.

I bring all this up to show the futility of jumping out of the market, waiting for it to come back to where it was when you jumped out, then jumping back in. Aside from the fact that no one knows where either of those points is, you miss out on the huge return on the money you should have been investing all through the dip and recovery.


you are exactly right, and to most people this is counter intuitive.

thanks for the info!

Thanks Dorkfish! Can you do my taxes? j/k :)

I read an excellent article by Ben Stein regarding investments. The point behind the entire article; buy, buy, buy. If the market plummets, buy. If the market shoots up, buy.

Never stop buying regardless of the cost.