I'm no financial guru, so take this with a grain of salt, but people who make frequent long-term investments into the stocks or mutual funds shouldn't be worried by yesterday's dip in the market. First off, the drop was pretty minimal.

For some investors, this type of sharp decline can be jarring. That's probably much more so right now than usual, simply because we've had a stretch of almost unprecedented calm in the markets in recent years. Despite the pullback last summer, the major market indexes haven't had a correction — that is, a drop of 10% or more — in almost 4 years. That's the 2nd longest streak of all time.

When the markets steadily rise, day after day, month after month, year after year, it's easy to get sucked into thinking that's normal. It's not. Stocks typically move higher in a two steps forward, one step back fashion. It's unusual to get multiple years without a significant correction. In fact, it's perfectly normal to get about one 10% correction per year. That's the long-term average.

I don't report all this to scare anybody off. Quite the contrary. If you know that it's normal for stocks to pull back by 10% or so roughly once per year, it's a lot less rattling when it happens. Knowing that 2% market moves in a single day really aren't that unusual helps us stay calm when it happens for the first time in nearly a year.

Second, people who invest regularly and don't plan to withdraw their money from the market soon will actually benefit from these dips. Why? Because if you assume that the market will reach some particular height in the future, it's better for an investor if it stays low for as long as possible until that future point, that way we can keep buying stocks cheaply for as long as possible.

A growth trend of (1%, -5%, 3%, 21%) will be more profitable than a growth trend of (5%, 5%, 5%, 5%) for an investor who puts money into the market over time. The investor who puts in a lump sum at the beginning of the trend will get the same results either way, but those of us who make monthly contributions into our 401(k) will do better in the first case than in the second. A person who has to withdraw their money after the third phase of the trends above would prefer the second trend, but an investor with a long-term horizon would prefer the first trend.

0 TrackBacks

Listed below are links to blogs that reference this entry: Market Dips Are Good For Long-Term Investors.

TrackBack URL for this entry: http://www.mwilliams.info/mt5/tb-confess.cgi/3056

Comments

Supporters

Email blogmasterofnoneATgmailDOTcom for text link and key word rates.

Site Info

Support