Greetings – here is our net worth update as of the close of business today, September 1st, 2015. I tried desperately to put this together before the market opened today, but my ongoing computer problems prevented it. Most of the market drop we saw today has been captured here.
It has been an interesting few weeks in the markets to say the least. I am not sweating about the market swings. What I do worry about is this: people I know will panic and dump their portfolios. The market goes up and market goes down. Who cares. Is the stock market going to disappear? I don’t think so. If it does, we will have much more to worry about, like say – I don’t know, complete social collapse.
Dollar Cost Averaging
Anyway, these market swings present the opportunity to take advantage of dollar cost averaging. Dollar cost averaging is very powerful and good friend during dark times. Investing fixed amounts on a regular basis allows the market drops to work in your favor. When prices fall it allows you to buy more units or shares of an investment and this can result in better returns in the long run.
To demonstrate the power of this concept here is a pop quiz.
Let’s assume that you have $100 dollars you would like to invest on the first day of every month. You will buy as many units/shares of an ETF that can be had with your $100 on the first trading day of the month.
Which scenario will result in the highest investment value at the end of 10 months?
The units are trading at $10 and slowly and regularly go up in value. After 10 months the units are now trading at $12.50. You are so happy because you are not “losing money.” Here is a graph to represent the price movement:
The units are trading at $10 and over the next 10 months the price falls until they hit $8. They do recover though, and at the end of ten months they are back to $10 again. Phew! Here’s the graph:
The units are trading at $10 and over the next 10 months the price fluctuates quite a bit. Lucky you though, because after 10 months, the units are up, trading at $11. Here is what it looks like:
I don’t know about you, but psychologically:
Scenario 1 feels like a warm hug.
Scenario 2 feels like a tragedy.
Scenario 3 feels like constant heartburn.
Well you may have already guessed where this was going or you may have seen these graphs before, but here are the results:
The warm hug did not perform as well as the other two.
The tragic scenario – wasn’t so tragic after all. It resulted in purchasing the highest number of units. Even though it did not perform as well as scenario 3, at this point even small future price increases, will have it outpacing the other scenarios.
The heartburn scenario was the winner here in total dollar gains. Was it worth the cost of antacid medication? I think so.
I saw this demonstration of dollar cost averaging many years ago and I remember how impressed I was with the concept.
Net Worth Update
Down but not out.
Still wondering if I should buy Netflix. What do you think?
*Does not include things with engines, pension, education savings, the loose change between the sofa cushions etc.
You can find my net worth and a gaggle of other bloggers over at the Rock Star Finance Ultimate List.
Thanks for visiting!