A Strategy For Investors Without a Crystal Ball  

When you invest regularly in your 401(k) Plan, you immediately have two advantages on your side. First is compounding tax deferred interest and second is dollar cost averaging.  In 2008, a bear market, dollar cost averaging to equity funds provided higher returns by taking advantage of buying in dips in the market/investments. When using dollar cost averaging, more shares are purchased when prices are low, and fewer shares are bought when prices are high. The end result is that over time the average cost per share of the investment will become smaller and smaller.

For example had you contributed $12,000 to the Vanguard S&P 500 Signal fund on January 8, 2008 you would have purchased about 96 shares and on December 8, 2008 that investment would have been worth approximately $8,118. However, if you invested $1,000 each month your $12,000 would have purchased 110 shares worth 12/8/08 approximately $9,334.

If you have continued to make contributions to your 401(k) during this bear market not only may you personally  have experience a higher return than the fund itself you will also hold more shares positioning you for higher returns in the future.

How Have Bear Markets Effected Long-term Returns

Since 1946 we have experienced 9 bear markets prior to this present bear market. They have averaged a negative 32.6% and have lasted an average of 14 months. Two of these bear markets have shown bear market returns greater than a negative 48%.

In the last 20 years we experienced two bear markets, -33.5% and -49.1%, followed by two bull markets, up 582.1% and up 101.5% respectively. During this time the S&P 500 had a 20-year annualized return of 11.9% but the average equity investor only experienced a 4.5% annualized return. Often the average equity investor allows their emotions to rule thus selling when the markets are down and buying when the markets are up.

The bull markets that followed these 9 bear markets had an average annualized return of 176.0% and they lasted an average of 68 months.

To benefit from the bull market it is best to take advantage of the bear markets. Stay well diversified in all asset classes within your risk tolerance, rebalance and use bear markets as an ideal time to further invest when markets are down.