At the end of every year I take some time to evaluate my portfolio and how I’ve allocated all of my investments. I always take into account changes that have occurred over the past 365 including sectors or investments that have take off, and others that have hit the downhill slope.
2015 was an interesting year. After a rough August, things ended fairly flat, and my portfolio overall endured a .4% loss. Pretty close to how the S&P 500 performed.
Anyone paying attention to the markets so far in 2016 may be feeling a bit rattled at this point. My personal advice… Don’t Be! Investing is a long-term game. 2016 may very well be a down year or even the beginning of a multi-year bear market. Take advantage of the opportunity!
A good friend of mine is an Advisor at Morgan Stanley. His opinion is that based on his personal analysis of the fundamentals, it’s likely that we’ll see a market retraction this year. But is that any reason to run for the hills? Heck no! Stay the course and treat the market decline as an opportunity.
Don’t forget about dollar cost averaging! Aside from compound interest, dollar cost averaging may be one of the most killer investing phenomena to take advantage of. If you invest money consistently – through the market ups and downs – you will end up with a lower cost basis over time.
Think about it this way, if you continuously save and invest your money in the market, you will inevitable buy more stock when the market goes down and less stock when the market is going up. That’s the beauty of dollar cost averaging!
Let’s take a simple example. Let’s say you invest $1,000 to purchase Apple (APPL) when the price is $100/share. You now own 10 shares. Now let’s say you invest another $1,000 in a bull market where the price of Apple has gone up to $120/per share. Now that same $1,000 has bought less shares, about 8.33 shares to be exact. If you invest another $1,000 in a declining market when the price of Apple has dropped to $70/share, you will have purchased about 14.29 shares.
Your investments will undoubtedly go through bull and bear market cycles. If you consistently invest, you will naturally buy more shares of an investment in a declining market and less shares of an investment when the market is going up. You can see that taking advantage of dollar cost averaging allows you to buy more shares of Apple with the same $1,000 investment when the stock is bearish and less shares with the same $1,000 when the market is bullish.
This helps you naturally lower your cost basis as you continuously buy more shares at a lower price and less shares when the price is high. It really helps you buy low which is the first step of the age old adage of “buy low and sell high”.
So what will I do? Well, I’ll continue on my investing plan and use the declining market as an opportunity to pick up some great value. At the very least, dollar cost averaging will give me a better cost basis in the investments that I already own and believe in!
Photo cred: Pictures of Money