3 years ago I had about $100k in a mutual fund that matches the S&P 500. Today that $100k has dwindled to about $77k because of the flailing market. During this entire period I have continued to contribute to the fund, so the number of ‘shares’ that I own has actually gone up, right? If the market were to rebound to where it was 3 years ago, my account would be worth substantially more than the $100k that it had at that time, correct?
Yes, you are correct.
BUT, your real measure should be how much you contributed in dollars versus how much it is now worth in dollars and then give it a haircut based on the time value of money.
Thanks for the reply. To extend the question, consider that this is my 401(k) and I will not be dipping into this for another 18 years. Am I actually better off with a down market now? Is it like buying stuff on sale? Would the ideal situation be a down market for 17 years and then a big finish at the end?
Considering you are in it for the long haul, the only changes you should make to your inverstments are when your circumstances change.
In other words, generally speaking, make changes based on your personal needs and not what the market does. If you are better suited at some point to be heavily invest in stocks, than say bonds or cash, you do that, etc.
Probably the best way to gain wealth is through dollar cost averaging. That means you invest a fixed amount, at regular intervals, regardless of the markets. In down markets you will buy more shares than when the markets are higher, but in the long run you will come out ahead than if you just always bought low/sold high (because it’s practically impossible to do that).
Your “buying stuff on sale” analogy is dead on. You’re getting x% of the US economy, where x is an incredibly small fraction, for each $77 you put in. In the past, you were paying $100 for the privilege of getting that same % of the entire US economy.
Duckster’s discussion of dollar cost averaging is pretty much dead on. Unless an investor is psychic or under the delusion that they can beat the market, dollar cost averaging is the way to go.