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Should `Builders' Avoid Choppy Markets?

Guest post by: Jim Lorenzen

Article Overview: Uncertainty has been a part of investing since investing began; and the world is full of people who are always 'waiting to see what the market will do'. Unfortunately for them, it keeps doing the same thing and they never begin investing. The result? Most Americans are unprepared for retirement.

Should `Builders' Avoid Choppy Markets?

Uncertainty has been a part of investing since investing began; and the world is full of people who are always 'waiting to see what the market will do'. Unfortunately for them, it keeps doing the same thing and they never begin investing. The result? Most Americans are unprepared for retirement.

So, what about now? Should you be investing in your 401(k)? Does it make sense for someone who wants to grow assets to invest in a choppy 'non-bull' market?

In my own opinion, it does!Here's alittle hypothetical exercise might provide a clue as to why most investment experts advise consistent investing.In our example, the price of our fictitious investment begins and $50 and goes down. In fact, it takes 10 years just to get back to it's initial price! Did systematic investing seem worthwhile? You be the judge.

For a benchmark, lets use a beginning value of $20,000.How would someone compare who invested $2,000 a year for ten years? Remember, in our hypothetical, the market never rises above its beginning number and ends-up even for the entire period.

Systematic Investing In a Down Market
				Benchmark			Second Investor
Market	Year	Price		$ Amt	# Shares		$ Amt	# Shares	Cum # Sh
	1	$50		$20,000	400		$2,000	40.000	40.000
-20%	2	$40			0		$2,000	50.000	90.000
20%	3	$48			0		$2,000	41.667	131.667
-25%	4	$36			0		$2,000	55.556	187.222
20%	5	$43			0		$2,000	46.296	233.519
-30%	6	$30			0		$2,000	66.138	299.656
20%	7	$36			0		$2,000	55.115	354.771
20%	8	$44			0		$2,000	45.929	400.700
-10%	9	$39			0		$2,000	51.032	451.732
28%	10	$50			0		$2,000	39.869	491.600

Lets examine the results:

Totals				$20,000	400		$20,000	491.600
Portfolio Value				$20,066			$24,661
Average Cost per Share				$50			$40.68
Value Per Share				$50			$50
Profit Per Share				$0.16			$9.48
Portfolio Profit				$66			$4,660.91

Interesting! Our systematic investor made a $4,660 profit on $20,000 - that's 23%! Over all and 4.57% per year compounded - in a market that never rose above its beginningpoint!

Our 'systematic' investor averaged a compounded 4.57% per year in a 'flat' market! Could you have made the same interest in a bond or CD? Perhaps, but in a taxable account, you'd be paying taxes on the interest at income tax rates. The gains in your stocks are likely mostly unrealized capital gain which wouldn't be taxed until you sell, and then at lower capital gains rates!

Sure, it's hypothetical; but the lesson seems clear; maybe money is made when everyone else is biting their nails.

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Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

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Article Tags: choppy markets, retirement, uncertainty
Referred by: http://blog.prospectmatch.com



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