No one likes to lose money. From an investor’s point of view, nothing’s worse than for their money to go down immediately in value after they make an investment. Jeff Sommer of The New York Times addressed this in his August 16, 2014, article “Hesitating on the High Board of Investing.” This enlightening article addresses related investment issues.
The first one I’ll discuss is “How long does it take to get one’s initial lump sum investment back if the stock market crashes right after you make your investment?” This query assumes one invested in the S&P 500, and all dividends were reinvested. The worst 12-month period began on July 1, 1931, when during the Great Depression, the stock index lost 67.6%. . .ouch. Assuming you stayed in the market, it would have taken 39 months to erase all the losses and break even.
More recently, the worst 12-month period began on March 1, 2008, when the market’s return was minus 43.3 percent. We all know people who bailed out of the market and never went back in. But if you had stayed fully invested, you would have recovered all your losses in 22 months! What’s more, you’d be sitting on enormous gains today.
Of course, those 22 months can seem like 22 years, and the losses often cause people to be more conservative with their investments. One way to be more conservative when investing in the stock market is to invest gradually in the market (dollar-cost averaging) as opposed to investing a lump sum. Sommer’s article cited a study by Bernstein Global Research which, between the years 1926-2013, compared investing a lump sum over a 12-month period compared to more than 1,000 one-year periods.
Interestingly, the research showed that the average one-year return for the lump sum investing was 12.2% compared to 8.1 % for the gradual 12-month investing. In other words, the lump sum investor earned 4.1% more return on their money!
Despite the conclusions of the research, lump sum investing may not be for everyone. The first rule of investing is to know thyself, and if you feel that investing all your money at once and having it go down in value would cause you to bail out, then perhaps it would be better for you to invest gradually. In my next blog, I’ll take an unusual look at the benefits of “losing money.”