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“Why would anyone keep investing when the market keeps going lower every day?”

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A friend forwarded me these, and I wanted to share them with you. Don’t automatically discount them just because they come from a financial company. These are excellent.

Think carefully about where you want to be 10-20 years from now, investing-wise.

The key takeaways:

  • If you believe the market will recover and grow over the long term, you need to be investing consistently

  • Whether you should be saving or investing depend on the time horizon of your money. If you need your money within the next 5 years (say, for a down payment), you should be saving it in a savings account. This hasn’t changed
  • If you truly believe that the next ten or twenty years will be “different” than history (or, admittedly, the same as the last 10 years) and there will be small, or no, returns, you have a few options: Stop investing, pull all your money out of the market (for some reason, many lay investors believe this is the only option), adjust your asset allocation, or extend the timeline of your dollar-cost averaging (i.e., instead of investing $300/month, invest $100/month)
  • If you believe that the market will recover and grow, keep investing. Feel free to adjust your investing timeline or any of the other factors above. But you recognize the importance of picking up shares consistently, since you can’t time when they’re high or low
  • From my book: “Recently, a group called Dimensional Funds studied the performance of the S&P 500 from January 1970 to December 2006, during which time the annualized return of the market was 11.1%. They also noted something amazing: Of those 36 years from 1970 to 1986, if you missed the 25 days when the stock market performed the best, your return would have dropped from 11.1% to 7.6%, a crippling difference.

    Now, if only we could know the best investing days ahead of time.”

  • If, however, you believe the news about how this time it’s different, you don’t invest, and then wonder why you only have what you managed to save over the next decade or two (say, a few thousand a year), you have nobody to blame but yourself. Our generation will almost certainly become increasingly conservative investors
  • The trick, of course, is that nobody will know for 10-20 years
  • No decision is a decision

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It comes out Monday, March 23rd (2 weeks from now). Pre-order now.

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36 Comments on "“Why would anyone keep investing when the market keeps going lower every day?”"

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the weakonomist
7 years 4 months ago

If you believe that this current economic environment is some kind of game changer, then just get out of the market all together. I don’t want your paranoid schizo self talking about doom and gloom while I reap the benefits of the biggest discount on my retirement I’ll ever see.

Every recession brings about fear, and the companies that can make money on your fear will make videos like this.

Nate @ Money Young
7 years 4 months ago

Ramit, thanks for the data. This is exactly why I continue to invest my money in the market. I can’t wait for the uptick. Patience is key.

-Nate

Ted
Ted
7 years 4 months ago

“From my book: “Recently, a group called Dimensional Funds studied the performance of the S&P 500 from January 1970 to December 2006, during which time the annualized return of the market was 11.1%. They also noted something amazing: Of those 36 years from 1970 to 1986, if you missed the 25 days when the stock market performed the best, your return would have dropped from 11.1% to 7.6%, a crippling difference.”

This is an illogical argument. Do you see why?

Stop Getting Cheated
7 years 4 months ago

Ramit, I think this past year has offered one of the best climates for continued investing. Collective fear has hammered the market to discounts we may never see again. I have been heavy long in UYG, UWM and DXO. Both DXO and UYG were under $2/share. I know my view is not for everyone, but I think there is going to be a huge upside.

Thank you for your excellent post.

Adam @ Checkbook Diaries
7 years 4 months ago
I agree that now is a great time to buy. It’s like the market is on a clearance sale. There are many companies out there whose stock value has suffered do to the market slide in general, and not as a direct result of poor business practices or profitability. I feel that it is also a great time to take a few low cost risks if you are a young investor. If you look at the airline sector you’ll notice that almost everything is down largely as a result in decreased travel spending due to the economic situation. Even looking… Read more »
Chris
Chris
7 years 4 months ago

Whenever I hear people these days acting like it’s completely stupid to invest in the stock market right now because it’s “obviously going down every day”, I ask them why they aren’t just shorting the whole market. When they stare at me in confusion and ask what a “short” is, I know they have no idea what they are talking about.

Then again, I also laugh at people saying it’s an “obvious” discount. No one can predict the future. The current price is just the current price, neither a discount or overpriced.

Graffight
Graffight
7 years 4 months ago

video’s aren’t showing 🙁

Neal Frankle
7 years 4 months ago

A great piece to remind investors that perspective and understanding has to trump emotion if you want to stay on track financially.

Enrique S @ The Corporate Barbarian

I think this is a great time for discount shopping, but I haven’t changed anything regarding dollar-cost-averaging. I’m still investing the same amount each month, and hoping that I’ve picked the right strategy. My horizon is 15-20 years, so I’ll periodically re-evaluate my investment decisions as I grow older.

Goal Hunter
7 years 4 months ago
Ted: Tell us why the argument is illogical — I’m interested to hear. It’s pretty common knowledge that stock market returns are not normal, but have lots of “improbably large” swings. Ramit, your comments are spot on in when you qualify them by saying “If you believe … then …” but where do YOU stand? I believe that the recovery will come quick. It will come too quickly for most of the cautious investors who will miss some of those huge up-ticks. I think now is the time to put your money at risk — risk of a profit. I’ve… Read more »
Sam
Sam
7 years 4 months ago

@The Weakonomist: I’m confused. You sound angry and argumentative, but appear to agree with the ideas from the documents. “Every recession brings about fear, and the companies that can make money on your fear will make videos like this.” They are trying to reduce the fear in this market… What are you getting at?

@Ted: I agree with Goal Hunter. Show me the illogic.

Jeremy Freelove
Jeremy Freelove
7 years 4 months ago

I’m guessing Ted’s problem is that they are ignoring the potential benefits of also missing the 25 days when the stock market performed the worst.

Goal Hunter
7 years 4 months ago

Ted should not ignore the 25 worst days, only the 25 best days. When he tries to time the market here’s what happens:

The bottom starts to fall out, so he sells.
The stocks start to run up, so he buys.

He banks all the surprise losses and misses out on the surprise gains.

lump sum investing
lump sum investing
7 years 4 months ago

I’m not discouraging anyone from investing in the market, but this is nothing more than a biased marketing pamphlet. It appears to me that they’ve shown how a single time, lump sum investment performs over an arbitrary 32 year period. Who invests like that?

How about the same analysis over a 10 year period ending in March 2009?

Where do they account for gains through other investments made by the investors who sat out of the market?

Cathy
7 years 4 months ago
If, however, you believe the news about how this time it’s different, you don’t invest, and then wonder why you only have what you managed to save over the next decade or two (say, a few thousand a year), you have nobody to blame but yourself. Our generation will almost certainly become increasingly conservative investors Very timely! I was just pondering this question last night and wrote about it on my blog. What Lessons Will Today’s Youth Learn from the Economic Tragedy Great point in the NYT article that your investment should be based on your career. Intuitively, this is… Read more »
rich @richlikeyou.com
7 years 4 months ago
I have 2 friends who both recently told me that they recently cut their 401k contributions. One was maxing out his annual contributions, and the other was putting 28% of his income in. They both dropped down to 4%. This move struck me as odd but they both insist it is the right move since their accounts have been dumping. I have always believed in dollar cost averaging and the fact that when stocks are cheap it is the best time to invest. I think some people get to emotionally tied to watching their investment accounts and fear that they… Read more »
mike
mike
7 years 4 months ago

Regarding #3 Ted,

The part of the argument that confuses me (and possibly the reason for Ted’s question), is that it talks about a 36 year horizon from 1970-2006, then indicates results based on missing the best 25 days from only 1970-1986 (which only focuses on the first 16 years).

I’m not sure why the argument doesn’t show the difference in earnings if you had missed the 25 best days throughout the entire 36 year period; unless of course those statistics would prove to be unremarkable.

Molson
Molson
7 years 4 months ago

To me this is the same fallacy that financial companies have been shouting for years. Over the long term, the stock market will only go up. If you believe in the basic principles of the market you would see a fundamental flaw in this logic: if over the long term the market will only go up, then there is no risk.

brian
brian
7 years 4 months ago
I’ve been putting every penny I can in the market since September. My portfolio is down 30+% if you only include ETF’s and large funds. It sucks, but I’m going to keep putting money in long term ETF’s. I view this as the opportunity of a lifetime. When in history have you been able to buy at a discount of 15+ years. For anyone in their 20’s who has only $1,000’s in the market, this is our opportunity. Even if the market goes down another 20%, 30 years from now, you will be in great shape.
chris
chris
7 years 4 months ago

I already received a copy of your book from Amazon…. I thought it hadn’t come out yet. Strange!

Great read so far!

iSawYourBook
iSawYourBook
7 years 4 months ago

Pre-order your book? I already saw it in the shelves of Borders in El Camino Real (in Santa Clara)

Carlin
Carlin
7 years 4 months ago
I tell my friends and people I work with this each time they start freaking out about the stock market. If the Dow goes to 0, you’re going to have much bigger issues to deal with than the amount of money you lost in your 401k. I think it puts things into perspective – there are things you could lose that are much more important than a few thousand dollars of investment value. Instead of obsessing about whether or not the market is crashing, leave it alone, and focus on working your ass off to make yourself more valuable at… Read more »
Sam
Sam
7 years 4 months ago

Why S&P 500?
Is it because it has the highest average return?
What about international market like the hang seng index?
Where can we learn these indices’ average return?

Danielle
7 years 4 months ago
I think a more useful example would involve parties that start out investing the same dollar amount each month. 1) S&P 500 – continues to contribute the same amount per month 2) S&P 500 – contributes $x more per month than they were before when the market drops 10% 3) S&P 500 – Stops contributions temporarily anytime the market drops 10% 3) 60% S&P/40% Bond – continues to contribute the same amount per month 3) 60% S&P/40% Bond – Contributes $x more per month anytime the market drops 10% 4) 60/40 – Temporarily stops contributions anytime the market drops 10%… Read more »
rupneu1
7 years 4 months ago

Yeah, in the long run S&P500 index outperforms most of the managed or balanced funds. Some managers can beat the index by few points, but after tax and expenses, it’s probably the same. That is why I invest most of my money in index funds. I also try to pick some stocks myself, but so far I’ve been loosing a lot on those. At least, with the S&P index (SPY), I’m no worse off than the market!

Generration Millionaire
7 years 4 months ago

It seems people are always doing it backwards – buy high – sell low, dollar cost average in during the ups and downs – unless our total system fails – this is still your best option for keeping up with inflation and hoping for a secure retirement

evie
evie
7 years 4 months ago

I’m with Danielle. Often, people comment about getting out of the market, etc. based on fear, but sometimes they are just using their resources differently. The past few months my extra income went to bolstering my emergency fund, but as soon as I’m re-employed and able to contribute again, I’m diving in.

SJ
7 years 4 months ago

I’m confused by the point of the first article.

Why would you ever sell if you were planning on buying back in when the market broke even???

I don’t even have to run simulation on market to tell you that the last two will fail…

Radu
Radu
7 years 4 months ago
In don’t understand why everybody is pointing to S&P 500 or DJIA as proof that the stock market always goes up. Why not take a look at how the Japanese stock market has fared in the last 20 years or so: The Nikkei index is trading at 20% of the value it had in 1989! This could very well happen to the US, especially since they are taking the same steps that led to Japan’s lost decades – not letting anybody fail, taking money from the efficient elements of the economy and offering them to failed banks and automakers, rewarding… Read more »
JMW
JMW
7 years 4 months ago
It’s my feeling that your approach to discussing this topic has some key drawbacks. That isn’t to say you are necessarily wrong on a factual basis, Ramit. Your analysis is keen and rational. But the issue, in my view, with teaching people how to invest is that people are not rational; in fact very rational people approach investing in the market with their emotions first. I am not sure that your article addresses how someone overcomes the emotional component of investing continually as the market drops. People really need to feel comfort with their investing decisions as the market declines,… Read more »
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[…] Why would you possibly invest when the market tanks […]

Dana
7 years 4 months ago
Investing in the current economic environment is not for everyone. In fact, investing in the equity market is not for everyone at any given point in time. Everyone is different and thus their financial needs at any given point in time are different too. Depending on your investment horizon, short-term and long-term financial obligations, risk tolerance, career outlook, and many other specifics that only you know, is this invested at all times, dollar-cost average up and down market reverence the answer for everyone? End of the day, if you are holding on to your money and wondering if you should… Read more »
The Masked Financier
7 years 4 months ago
I’ve stated similar views on other posts before, but I think blind investing of money into the market is not a good idea. If the objective is to teach people how to be rich then there needs to be some effort to teach people how to invest wisely not only with respect to timing of getting money into the market, but how to invest. After all, Ramit’s method is simply a way of enforcing discipline onto an investor rather than subjecting oneself to the emotional trauma of the markets. As an example, one could make some effort to replicate a… Read more »
financial planner
7 years 2 months ago

If you don’t try to time the market, in other words, invest from the time you are 22 years old until you retire at 62 years old, you will be fine.

Unfortunately, not many people do this, and studies show that investors put more money in at market tops (more money flowed into tech mutual funds in the first quarter of 2000 than any other quarter). So unless you have proven skill at market timing, your best bet is to invest consistently.

Christophe Keller
7 years 22 days ago

Hi Ramit,

Any thoughts on ETF vs index funds? I read your book and would like to invest in index funds but I live in Europe (Belgium) to be precise and I don’t have access to Vanguard or Fidelity index funds as an individual. It seems however that I could buy ETF’s from those via an online broker or my bank. Oh yes in Belgium we don’t have capital gain taxes

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