A reporter from SmartMoney contacted me a couple of weeks ago to ask me to participate in a little game they were hosting. “All you have to do is guess when the Dow will hit 10,000,” she said. “This is just for fun.”
“I’ll do it,” I replied, “but I want to make it clear that this is just a guess. Nobody really knows.” I told her the Dow Jones Industrial Average would reach 10,000 again on October 15th at 10:22am Eastern. I was wrong — but not by much. It actually reached 10,000 at 1:21pm Eastern on October 14th.
I know this because I’ve been sitting here for the past ten minutes refreshing my browser page, waiting for it to happen. And it just did:
The Dow has hit 10,000! We’re saved! The recession is over!
Well, not really. But sometimes it seems like that’s how the media reports things. I find it hilarious that of the three dozen “investing pros” Smart Money polled, my seat-of-the-pants guess was second closest. (Who won the pool? Financial-planning guru Sheryl Garrett, who guessed 10:00am Eastern on October 14th.) Nobody knows what the stock market will do, and the guess of a humble financial blogger is just as good as that of an investing professional.
My brain hurts
While goofing around, waiting for the index to cross that arbitrary but magical line, I read articles linked from Google Finance. One was this piece from MarketWatch about how traders who favor “technical analysis” don’t care so much about Dow 10,000, but are more interested in when the S&P 500 index will cross 1121, which means it will have regained half of what it lost in the bear market. They believe that when the S&P reaches this point, it’ll have momentum to continue to climb.
The interesting part of the article, though, came in the middle. In the “befuddling rally” section, a “chief investment strategist” says that the market’s continued increase is frustrating to those who are waiting for a “sizable price decline” before re-investing.
Do price declines in the market get any more “sizable” than the one we experienced from September 2008 to March 2009? What were these people doing with their money then?
Are there really people who are waiting to invest in stocks because they want the market to fall 5% or 10%? That seems crazy! By waiting, they continue to miss out on market growth. Have they been waiting since June? Since March? Will they finally put their money back into stocks at the start of the next bear market? And will they then pull the money out again when the market hits bottom?
In another MarketWatch article, a second “chief market strategist” is quoted as saying that the Dow breaking 10,000 could bring back a “whole portion of the population that walked away from Wall Street in the last couple of years because of everything that has happened”.
sigh
I don’t even know what to say. This sort of stuff drives me nuts. I guess it’s another reminder that it pays to ignore financial news. I’ll just keep investing my money at regular intervals, thank you very much. All of this guesswork and market timing seems like a bunch of nonsense.
Folks, stick to your investment plan. Don’t try to time the market. Keep your goal in mind, make contributions to your retirement when you can, diversify, and don’t let the financial media mess with your head. They don’t know any more than you do.
Footnote: The Dow closed above 10,000 today for the first time in more than a year. CNN Money writes: “While 10,000 is not a significant milestone on a technical basis, it’s meaningful on a psychological level, analysts say. It could either usher in more buyers or give investors who think the rally has been too much, too soon a reason to retreat.” I love that. It basically says: Well, maybe more people will invest now, or maybe they won’t. Really? You think? See also: Our recent discussion of Mr. Market’s wild ride.
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OMG! It’s OVER 9000!
Sorry, couldn’t resist.
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You are assuming that other people are sensible. They’re not. Plenty of people will start investing if it seems like the market is now going back up. This is because they can’t do math.
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You’re right, but that doesn’t mean we’re above 10,000 for good. Not saying it won’t stay over, but momentum isn’t the only factor.
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jd:
i should hire you as my fortune teller
anyway i visit several financial web sites today and YOU ARE STILL THE BEST!!!
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While it won’t affect my market strategy, I agree that crossing 10,000 is a nice psychological boost and will help us with the “emotions” of the recession, even if it doesn’t on a purely technical basis. Part of the equation is, after all, consumer confidence.
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FYI: If you’re using Google Finance and a modern web browser, you shouldn’t have to refresh the page. The quotes will update in real-time.
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Just remember that these experts’ job is on the line, they want to “convince” people to “invest” in the market so they can continue to get a paycheck.
The arbitrary number of 10,000 is just that, arbitrary. But, if they say it will boost confidence or some other BS psychological argument, the sheeple will believe.
The stock market is not some beast that we cannot control, but rather, its mainly made up of ignoreant and naive people, and it’s these people you can manipulate to make your fortunes.
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No psychological effect on me, I find the Dow Jones a useless index.
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Hmmm…good job. I would be very cautious about our stock market though. The P/E ratios of the DOW and SP500 are historically extremely high. (Another correction?) I bet on it.
The big question is will the dollar stay the reserve currency of the world. Because if it doesn’t, we will be in for it. Emerging market nations have already talked about dumping the dollar out of their holdings and as a reserve currency over time. This is extremely scary. Remember, as the dollar lost 95.5% of it’s value since 1913 (provided by government calculations), gold has held it’s wealth throughout history. If you want to gamble and stick with the stock market and dollar because YOUR generation and YOUR life hasn’t seen much crisis, then go ahead. But I like to have a longer term outlook to combat any crisis that may occur.
Always question what you read and hear on CNBC and other media outlets. Remember they were estatic about the DOW about 3 years ago and didn’t think the housing market had a bubble. Do your own study and make the best decision you can.
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It will be interesting to see how many people gave advice to regularly invest when the Dow was at 8k level.
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My thoughts on the Dow mirror Jon Stewart’s:
http://www.thedailyshow.com/watch/wed-march-4-2009/the-dow-knows-all
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@Dan K
“Remember, as the dollar lost 95.5% of it’s value since 1913 (provided by government calculations)”
That’s consistent with an average annual compounded inflation rate of about 3%, which is not exactly scary.
“gold has held it’s wealth throughout history”
In adjusted dollars, gold is worth less than half of what it was 30 years ago. The notion that gold is somehow intrinsically valuable and retains its worth is nothing but a myth. It’s just another commodity, subject to the whims of investors and manipulators. What’s more, it pays no dividends or any other form of income. It’s a useful hedge in a diversified portfolio, but taken in isolation it’s a catastrophically bad investment.
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Agree that they don’t know any more than you do.
But that’s not human nature. You can give out all the good advice you can – but it only works for that minority who do not make important decisions with their emotions.
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Hey, don’t underestimate the value of the Dow breaking 10,000. When it broke through the first time 10.5 years ago it caused the market to soar upward to the levels we have today….
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Nice to see a voice of reason in all this. But I will be interested to see the psychological impact, because there’s such a collective fear holding on to our national psyche right now.
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J.D. your take on the Dow breaking 10,000 is refreshingly calm. As you stated, for 99% of the people reading this blog this arbitrary milestone has no affect on their long term financial goals.
In the case of traders and other institutional money managers Dow 10,000 has a little more significance in that as the market continues to rally those who were left out of the rally will become more desprate to boost their returns to match those of their peers. This has nothing for most of us to be concerned about.
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10,000 is still way below the level it was at before the financial crisis.
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“Are there really people who are waiting to invest in stocks because they want the market to fall 5% or 10%? That seems crazy! By waiting, they continue to miss out on market growth. Have they been waiting since June? Since March? Will they finally put their money back into stocks at the start of the next bear market? And will they then pull the money out again when the market hits bottom?”
Just to point out what I think should be obvious. You should be selling right now. If your asset allocation was in balance in March, it is seriously overinvested in stock right now. You sell when the market is going up, you buy when the market is going down. So I can imagine some people who have cash are waiting for the market to fall before they start buying.
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Money is mental! And financial pundits needs stuff to talk about, and all this is just fun.
The one good thing though is that it seriously is a bull market, and a lot of people are again making a lot of money!
Congrats all!
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Ross says, “You sell when the market is going up, you buy when the market is going down.”
I checked out your website, and the subtitle of your website claims “You aren’t smarter than the market. It really is that simple.” This seems to contradict your comment.
It seems that someone who removes their money when the market is going up is just as speculative as a person who takes the money out while it is going down. Both are a guessing game because you don’t know if the market is going to continue going up or continue going down.
I agree with your tagline that you aren’t smarter than the market (and yes, I also agree that it is very simple), but your observation that you take money out when the market is going up seems to be contradictory.
Can you elaborate?
Thanks!
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“a lot of people are again making a lot of money!”
Only if they are selling or are working on Wall Street. At some point people have to recognize the difference between unrealized gains and money in the bank.
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Ross, I actually agree with you — mostly. The time to buy is when the market is low. The time to sell is when it’s high. But the media seems to preach just the opposite. If March and April weren’t good times to buy, why is now somehow better?
The problem, of course, is being able to determine what is low and what is high. Sometimes — as earlier this year — it seems pretty clear that the market is low. (And obviously it’s clearer in hindsight.) Most of the time, though, it’s more difficult to know, especially for the average investor. Market timing is difficult (if not impossible). That’s the reason I advocate sticking to your plan — whatever that may be. And it’s also the reason I’m fond of making regular contributions.
Dollar cost averaging is not a panacea, but it helps the average joe save for retirement without having to worry about all of this ballyhoo and nonsense.
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It’s simple, really. The market had the 3 biggest surges right after I pulled my money out. Want it to go down again? Just say the word and I’ll put my money back in – guaranteed to crash. It seems to be a proven formula on more than one occasion for me.
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Good insights, JD, thanks for this post.
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Some financial “gurus”, many of which appear on well-known websites (such as MarketWatch.com) indeed often make “safe” claims which are essentially, “… and that’s why the market will now either go down or go up.” However, please understand that there are other investment – and trading – strategies out there, not just dollar-cost averaging. In your post, it seems you make an implicit assumption that it is the best (or the only sensible) investment strategy. Not so: other methods may be more suitable under certain circumstances, for certain individuals. And yes, perhaps those “real people” want the market to fall 5% or 10% – just like you want it to rally [in the long-term].
Some forms of market-timing may work for some people, who it turn may not comprehend how others can advocate buy-and-hold or dollar-cost-averaging strategies. But if that’s their investment (or trading) plan, pursuing it is actually what you advocate: sticking to it. And while we have to be very careful with the financial media, it’s not necessarily true that “They don’t know any more than you do.”
Many people indeed don’t know what they’re doing, but it does make [at least some] sense to “buy the dips” in the current rally. Until March, it was a bear market; from then till now, I don’t think there was a sizable dip. Yes, many subscribers to this investment philosophy missed out. But I do not think it is inherently wrong or unprofitable. Just different from yours…
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If you invested in March or April you surely hit the vale for this time. But I am sure no matter if you invested then or do it now – You will still get a good return on your investment in the long run.
The only facts that concerns me are the bonus payments the bankers get again. 145 millions for one year of work? This makes me wanna stop investing for private and look for an investment job.
Of course I don’t do it. I bet it’s no piece of cake
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something that i have never gotten my head around is why the DOW is so high. looking back at the history of the stock market, the DOW was in the hundreds and there was no hint that it would ever get this high. can anyone give me a good reason why it is rising so high?? because nobody i have asked seems to know
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Don’t underestimate timing the market: I moved my retirement fund back in March from a no risk into 2 high risk funds. Today it’s worth about twice as much.
But no, I don’t play with investments on a regular basis, When you see the market drop to 1/2 it’s previous value though, it’s a fairly safe bet some rebound is due.
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Are there really people who are waiting to invest in stocks because they want the market to fall 5% or 10%? That seems crazy! By waiting, they continue to miss out on market growth.
You’re starting from a false premise (my opinion!), J.D.
The market was at insanely high prices from January 1996 through September 2008. In every case in which the market went to insanely high prices in the past, it fell to insanely low prices in the following years. Insanely high prices are caused by investor emotion. Emotional extremes in one direction beget emotional extremes in the other direction.
We are now at a P/E10 level of 19. The historical record tells us that we should expect a drop to something in the neighborhood of 8 before the insane levels of emotion pushed into the system through the widespread promotion of the Passive Investing concept for many years has completed its work. There are a good number of people not expecting a drop of 5 percent but a drop of 50 percent or more. For example, Yale Professor Robert Shiller has said that he will begin buying stocks again when the P/E10 level goes below 10.
Are those who are waiting to buy “missing out on market growth”? This statement suggests that every price increase is a sign of market growth. It’s not so. If we experience a price increase of 6.5 percent real in a year, that’s market growth. That’s a price increase justified by the economic realities. When we experience a price increase of 20 percent or 30 percent (as we did in the late 1990s), that’s not market growth, that’s borrowing from future returns. We are today about halfway through the process of paying back the borrowing from future returns that took place in the 1990s. We are paying back what we owe on our Stock Market Credit Card.
I don’t believe in credit card debt and I don’t believe in Bull Market debt. For the same reasons. I love the idea of participating in genuine market growth. Until large numbers of investors again come to an acceptance that only stock price increases that are genuinely supported by market growth count in the real world, I am going to be skeptical of any big price run-ups. This is what you always see when investors are gradually coming to terms with a drunken binge stimulated by the promotion of the “idea” that stocks are the one thing you can buy for which price doesn’t matter.
Rob
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A few comments -
1. There are alot of signs to time the market in general terms. Warren Buffett was clearly saying the market was overpriced in 2006, stating he was holding more cash than ever before and could not find any good deals. Last year in the heart of the panic he stated he was pouring money into stock.
2. The average investor hopes that Wall Street will play fair, as we’ve seen again (and again and again) in the past few years the “experts” on wall street do take advantage of the money they are given to manage, whether its in a mutual fund or as the CEO of a corporation. Don’t believe a fund manager or anyone else is watching your money for you. A stock mutual fund will invest in its sector, hold its required cash percentage, and continue down that road to hell, it cannot change its investment strategy (by regulation and law!), so you have to change yours. Wall street is making alot of money from investing your money.
3. As hundreds of millions of Americans put money individually into the market through thousands of different investment vehicles, they need to become educated and learn to take care of their own money. Also, as more money is placed into the stock market because its the place to get the best returns (we’ve all been taught this) understand that the basic market rules of supply and demand apply to the macroeconomics of the stock market. Meaning, the more investors that want to by the limited supply of stock, its price goes up. Look at average price of stock compared to its earning over the last 25 years, this ratio has continued to get worse, meaning stock is getting more expensive compared to the companies earnings or profits.
4. If you take care of the basic financial steps first (no debt, emergency funds, paying off the home) you can afford to take risks with investments. Then make smart, educated decisions you research yourself. Buy low, sell high still makes sense, anyone thats watched the market should be able to see this (warren buffett sure knew it!).
5. Don’t let your emotions rule your financial decisions because you have your financial safety net (emergency fund), right? Don’t invest money you can’t afford to lose (this goes to asset allocation). Everyone likes stocks for the long term returns but loves to ignore their high risk status. Remember investing 101, stocks high return/high risk, bonds low return/low risk? Then when stocks go down in value quickly, everyone acts shocked! If you’re almost ready to retire, pull your retirement off the table and place it in conservative investments.
6. I’m a believer in dollar cost averaging when you don’t know what to do, but when people talk about record highs, start pulling back. When they cry about record losses start putting more in. Be smart, research where you are going to put tens or hundreds of thousands of dollars, then do what makes good financial sense (not emotional sense).
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One thing all the foolish Dow watchers need to remember is that the stocks that comprise the Dow are subject to change and when individual companies get too small they get delisted. Travelers insurance and one auto maker was removed meanwhile Cisco was added.
Alas, will the fools ever learn?
-Mike H.
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@ Rob Bennett,
I agree with alot of your points, passive investing has driven prices very high as reflected in P/E ratios (just what i said in my earlier post as well). I do think that you can participate some as long as you smartly review your purchases. I doubt we will see another large drop in the next few years as the psychology of western economics is already starting to kick in. Most people think we are doing good and therefore we’ll see some continued run up. However, if you bought in during the dark hours of last winter you’d have made big profits already, and like I suggested earlier could start slowly pulling back your positions, placing money in safer investments. Another good opportunity was and still is probably real estate with its huge losses. But again as I said before, people need to get smart on their investments and make educated decisions and watch them closely, the markets will not magically protect you!
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You may have come in second place JD, but perhaps not by as much as you think. The winner was significantly closer in terms of real time, but when taking into consideration the time that the market was actually open for trading, you only lost by 10 minutes!(Sheryl off by 3h21m; JD off by 3h31m; based on the trading day of 9:30-4:00)
Which is nice…but even this comment is a moot point because as your article points out, it doesn’t matter if you were 10 minutes behind the winner, or you won by a million minutes, or lost by a million years! TIMING THE MARKET IS A FUTILE EFFORT!!!
BTW: Even though this is my first ever post, I have enjoyed your site for (at least) a couple of years now. I told my friends about the site while we were on a hiking trip, and now they visit it too. Congrats on your transformation/enlightenment JD, and thanks for not only providing sound insights, but also providing a “good read” every day.
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@ Rob Bennett
Ahhh! This is what I’m trying to tell people. The valuations of the stocks don’t match up to their prices. The DOW is extremely overvalued! On top of that, as a country we are in debt.
I said the dollar lost 95.5% of it’s value since 1913. A reader argued me. That’s seems not to bother him/her as they contested that it’s only 3% inflation per year. Well if you even read THIS site you will understand the effects of compounded interest (or inflation). It’s a stealth tax on the population yet nobody contests it.
The dollar was taken off the gold standard in 1971. Look at inflation historically over the long term. The dollar has lost value at a quicker and quicker pace. Why do people put up with this? Have we not learned from history…the history of the Roman Empire and the Wiemar Republic?
Gold will hold it’s value. Yes, the other person was right in that Gold has had a tough time in the recent past as an investment. (Excluding the nearly 300% gain in the past 10 years) But when people loose faith in the dollar as the reserve currency because we decrease it’s value with debt and monetary policy, it will again skyrocket. We are only wealthy because people believe in our fiat currency. We don’t produce anything. It’s debt. And when that trust breaks (as it has), the dollar will nosedive and gold will skyrocket…it’s just the question of when.
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In June I dialed down my exposure to stocks for my retirement fund about 10%. This was the right decision for me because as a passive investor it is not superhelpful for me to be panicking or elated each time the stock market goes up or down. So it really isn’t too much concern for me, 20+ years away from retirement whether stock market today is 10K, 7K or 13K, as long as in the long term it gives me returns above what I can get from savings vehicles and above inflation.
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1) There is a difference between “timing the market” and letting the market time your investment. If your investments were properly allocated last fall, in March you were seriously underinvested in stocks. You should have been buying. Now, you should be selling because you are seriously overinvested in stock. It has nothing to do with “timing the market”.
2) Most of us are “savers”. We are putting more money into our investments than we are taking out. In other words, we are most always buyers.
But the market goes up and down every day. If you put $5000 in your IRA on April 15th, 2007, you hit pretty close to the market peak and have still lost money. If, instead, you had put $100 a week into your IRA for the year before that, you are probably pretty close to even or have made some money. Essentially you paid the average price for the year, a much better deal. Dollar cost averaging deals with risk from the volatility that is inherent in the market.
3) Of course, we aren’t always savers when saving to buy a car, a house or pay for our kids college. Which is why that money is should be in much more conservative investments than money you are saving for retirement in 30 or 40 years.
4) Gold is an entirely emotion driven market. There is no reason to think it will hold its value. If you are concerned about inflation, you are better off buying tangibly useful goods that you will be able to use the rest of your life. Or invest in yourself and take a class.
5) Both the notions, that the market fell so it should go back up and that the P/E’s are out of wack so the market should fall, are true. Which is why timing the market is an idiot’s game. Sometimes you will be right and pat yourself on the back, like people who moved all their money into the market last spring. Other times, you will be wrong, but you will have a lot of company, like last fall. It will all be so obvious in retrospect. Shiller has been right for the last decade – but for most of it he appeared to be wrong. The people who took their gains out of the market during that decade made a lot of money.
Which brings you back to now. If you keep your investments in a stable mix, you will pull gains out of the market when it is going up and you will put money into the market as it goes down. Overall, you will have bought low and sold high.
Don’t time your investments to the market, let the market time your investments for you.
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Can’t believe no one has asked this yet:
When will it hit 11,000?
@JD – I just saw this – there’s a whole write up about Mini owners I thought you might enjoy
http://finance.yahoo.com/family-home/article/107938/what-your-car-says-about-you.html?mod=family-autos
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I don’t mean to oversimplify this, but these are the two stock market investing methods I use:
1. Buy when prices are historically low. If a stock normally has a P/E value of 18 and is now currently at 10, it’s time to buy. If the stock is close to its 52 week low, it’s a good time to buy. Have some money put aside for when this happens.
2. Don’t sell when the market is up, buy and hold. Only invest money you don’t need in the next 5 years. Dividends will continue to roll in and compounding will make you very rich one day.
Step three entails having a happy (and wealthy) retirement.
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The NYTimes this morning had a headline in the Business section suggesting a “Dow Bubble” — and don’t think one has to read any further! I think it is completely silly to care what the Dow stocks (a tiny proportion of everything in the market) do. Especially since when the Dow goes down again (like maybe today), it can have such a bad effect on consumer confidence… The media should find other ways to tell people about the economy; the Dow is just not very informative
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@Dan K (#34):
“But when people loose faith in the dollar as the reserve currency because we decrease it’s value with debt and monetary policy, it will again skyrocket.”
This is a myth. Time and time again, history has demonstrated that when disaster strikes and currency becomes useless, people do NOT turn to gold coins for their commerce. They turn to tangibles with intrinsic value. After the Boxing Day Tsunami in Asia, people weren’t trading gold coins. Food was the currency. In New Orleans, after Katrina, people didn’t barter gold coins, they bartered drinking water and gasoline. When economies collapse, gold is just as useless as dollars. You can’t eat it, you can’t drink it, it won’t keep you warm.
Gold ONLY has value because we as a society have collectively decided to agree that it does. It has no real intrinsic value. Just. Like. Money.
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@Pey (#38):
“1. Buy when prices are historically low. If a stock normally has a P/E value of 18 and is now currently at 10, it’s time to buy. If the stock is close to its 52 week low, it’s a good time to buy. Have some money put aside for when this happens.”
Great advice, Pey. I did that with Nortel stock and watched $10,000 plummet to literally pennies.
Market timing simply does not work. Thanks for trying to help, but you must realize that what you’re advocating is STILL market timing, and you can still get burned. You may have gotten lucky in the past, but that’s all it was – luck.
People should structure their investing around buy-and-hold and dollar-cost-averaging. Anything more complex will eventually burn them. Maybe not right away, maybe not for years. But eventually, everyone’s luck runs out. NEVER try and time the market. It’s a good way to squander wealth.
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Sometimes I feel like everybody treats the market as such an abstract impersonal concept… and it is in a sense. It represents the supply and demand of money free for investing I suppose. But what about the pure heart of it – at the core of the stock market isn’t it just someone giving someone else money to do something with it in return for a portion of the hoped for profit?
Is ditching them when times are tough really all that profitable to either of you?
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@ Kevin
I think you have a great point. If an economy collapses, other tangible and useful goods are worth much more.
One instance where there is a contradiction is in Zimbabwe and Argentina when their economies collapsed. Gold was valuable.
It also is interesting to me that Gold has always been worth something. The Rieshmark is no longer of any value. The dinnar is no longer of any value. Many other currencies come and pass, yet gold has always been worth something. When gold was our currency and there was not a Federal Reserve, inflation was approximately non existent and market bubbles (if any occurred) would pop suddenly and correct themselves quickly.
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……ye many people are looking for the security in their financial status ….keep on clicking until they reach the said payout .the question when will it hit 11,000
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@Ross Williams #36
“But the market goes up and down every day. If you put $5000 in your IRA on April 15th, 2007, you hit pretty close to the market peak and have still lost money. If, instead, you had put $100 a week into your IRA for the year before that, you are probably pretty close to even or have made some money. Essentially you paid the average price for the year, a much better deal. Dollar cost averaging deals with risk from the volatility that is inherent in the market.”
Just wanted to throw a contrarian point of view out there since so many people (including the master of this great site!) are in love with dollar-cost averaging (to shorten this post I’ll call it DCA from now on).
Of course if you pick the PEAK before a collapse as the day to compare a lump-sum ($5,000) investment vs. DCA ($100 every week) the latter is better. Conversely if you pick the absolute trough of this latest collapse, a lump-sum investment on that day will return far better results than DCA. All that leads us back into is attempting to time the market. That being said, if you think about the performance of DCA vs. lump-sum over the entire performance of the market you seem to get a result very similar to what I stated in specific terms above. If your starting point is near a peak, DCA wins, if its near a trough, lump-sum wins and the paths of the strategies cross somewhere near the middle, i.e. if you take a time period where the starting price and ending price are exactly the same then lump-sum wins if the action goes up first, then back down to the starting point (mountain-shaped) and if its V-shaped DCA wins.
If you mathematically map this it starts becoming more evident that on an even playing field, the 2 strategies are a coin flip because its not volatility that makes DCA win, its the shape of that volatility, and we can assume that shape evens out over time.
HOWEVER, if you believe that the macro pattern of the stock market (50-100 years) will be similar to the past and increase, then lump-sum investment wins out because even if it dips first, and your DCA strategy gets you some shares at a cheaper price as that price crosses the threshold your DCA is now buying at a premium to the initial lump-sum investment. As time continues, and this macro pattern continues to go up, the benefits of DCA buying on dips are outweighed by your DCA buying at higher prices (remember our macro pattern is the market going higher so the peaks are higher than the valleys over time) and the end result is that if we believe in the afore-mentioned macro pattern, lump-sum investment wins hands-down.
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@ Kevin,
For gold to be worthless, you’d need an entire world economy collapse. You state that people in Katrina weren’t trading gold, which is probably true, but if they had gold they certainly could have spent it/traded in for cash in the other 46-47 states not adversely affected by it. There’s been no time in our history of civilization where gold was not worth something to somebody somewhere. In those disasters, if you had flashed a couple gold coins at the relief workers, you probably would have been able to procure more goods than the guy holding two rocks in his hand.
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Have you read Nassim Nicholas Taleb’s “The Black Swan”? He suggests that your random guess is likely to be more accurate than the financial “experts”‘. An antidote to most of what the media and the economists tell us, and very entertaining with it.
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“If you mathematically map this its starts becoming more evident that on an even playing field, the 2 strategies are a coin flip.”
To be clear, dollar cost averaging is a risk management strategy. Like most things that lower risk, it often lowers average returns.
On average, you will win a coin flip 50% of the time. If someone offers to give you odds of 101 to 100, you will, on average, come out ahead if you flip the coin enough times. But if you flip the coin once, you don’t get any benefit from the averages – you will either win or you will lose.
If you invested all your money at yesterday’s close instead of today’s (the market is down at the moment) you will never recover the difference. Just like flipping the coin once. Using dollar cost averaging is like flipping the coin numerous times, you get the advantage of the fact that the market goes up on average. Just like those odds of 101-100 in the coin flipping example, you will make money. Of course you give up the possibility of a windfall if you guess right the first time.
The Armageddon examples where gold is worthless are not very likely. That said, while you can buy water with gold, it would have been a better investment to stockpile the water. Its a lot cheaper than gold.
Gold’s value is that it is relatively durable and has high liquidity, unlike stockpiled food. But gold’s price is never close to its intrinsic value. It has gone up much faster than the rate of inflation. Most of what you are paying is speculative – a sort of permanent bubble. That may or may not be sustainable.
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@ Ross Williams
I am in agreement with the first part of your comment, but with the latter I have a few conflicting points I would like to make. “While you can buy water with gold, it would have been a better investment to stockpile the water.” Well what if the gold is worth so much you could buy a water storage tank. I do see your point though. I think having a good source of clean water is very valuable to security and enough gold may not be able to buy enough to last or is too cumbersome in dealing out to a supplier of water.
I think gold’s value is more about it’s nature of being constant. There is only a certain amount. (Yes you can mine gold but it’s harder than say silver) Because it is rare and constant, you cannot manipulate it’s worth FROM A CENTRAL BANK. Yes, speculation can drive it up and down, but it will always stay around the same amount of value. (Unlike a continually printed dollar that loses value as soon as it is made)
I am interested in your view that gold has gone up at a higher rate than inflation. If you look at all the wealth in the world. Put that into dollars. And then divide the gold up between the dollars, I think you will find that it takes much more dollars to purchase the same amount of gold. That’s just my theory…could be wrong.
1980 – 2000
Dollar – lost 62% of it’s value
GOld – lost 118% of it’s value (Gold did worse and did not keep up with inflation)
although…
1913 – 2009
Dollar – lost 95.5% of it’s value
Gold – Increase of 2,819%!!!(That complements your theory)
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This discussion is difficult because so many things are not correctly understood when it comes to finances. But the key is to educate yourself but not think you know it all, and at the same time be able to not be emotional about your finances.
Be careful about who you trust with your finances, including financial advisors, “wall street”, and anyone else.
If you look at successful financial people, they follow the advice above…be careful…buy what you know…don’t be emotional about financial decisions. This is VERY hard to do, that’s why most of us are poor. But to say you can’t learn about markets just feels good, “I can’t control my investments so I just dollar cost average and hope” is not the best plan either. It will leave you more likely to be victimized by “financial professionals”. When wall street had its latest meltdown, did any of the thousands of people who got rich offer to pay back everyone else? No,they just went to their lawyers and made sure everything was legal, though not moral. Where were all the Ivy League experts when the tech bubble burst? $400/share prices for companies that didn’t make money and didn’t really have a product? You need to know enough to call a foul a foul.
The Wall Street financial experts make money on every transaction the average joe makes in the market. They also have their money in front of you, they are the first in when things go well and first out when things go bad. You can’t give people hundreds of thousands of your dollars and hope they take care of it. So many people have had retirement savings shattered because they trusted someone else to do their financial hard work. Do some research and work hard to protect your hard earned cash, it will serve you well if you do.
Lastly, the buy gold because the dollar isn’t real currency has never worked. The collapse of the dollar will not do well for your gold. People will barter for real things, i.e. food, vehicles, food, gas, food, shelter, food (get the picture?)
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