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<blockquote data-quote="Brodiaga" data-source="post: 900890" data-attributes="member: 4967"><p>For guys in the accumulation phase who don't intend to start withdrawing their investments at least in the next few years (most of us), a significant market drop is a good thing. It's a buying opportunity because stocks are on sale. </p><p></p><p>Consider two market scenarios for the next 10 years from now on. Let's assume you invest in a low cost mutual fund or etf which tracks the S&P500, such as VFIAX from Vanguard, and dollar cost average $1000 into this fund every month over 10 years. You don't plan to start withdrawing money at least 10 years from now. </p><p></p><p>Scenario 1. S&P500 constantly grows at 4% per year. Small fluctuations, but no significant drops. At this rate, it goes up 42% in 10 years.</p><p></p><p>Scenario 2. Over the course of 10 years, S&P500 drops 50%, then bounces back, then drops another 30%, then bounces back again. By year 10, it is at the same level as in Scenario 1: +42% above the current value. </p><p></p><p>Which one would you prefer? Assuming other things being equal, I would prefer Scenario 2, because the same 1K/month will buy more shares when the index goes down. In the end, you'll end up with more shares/units of the fund you're consistently investing in and therefore a higher net worth as long as you don't freak out, sell low or try to time the market, but instead just keep dollar cost averaging consistently.</p><p></p><p>Granted, there is no guarantee that the index will be much higher in 10 years or even that it won't be below its current level. Also, significant drops in stock prices may be caused by or occur around the same time as recessions. Recessions tend to cause many people to lose jobs and not be able to invest consistently. However, the purpose of this illustration is to show the math behind long term investment. Also, people are more flexible than mathematical models or excel spreadsheets. For example, if there is another market drop 10 years from now, an intelligent investor will know that it's not a good time to retire and start drawing down his savings. He will just keep hustling until the market goes back up again, let's say another couple of years, and then retire and adjust his asset allocation to be more conservative and less dependent on market swings. </p><p></p><p>I have not sold any of my investments and not planning to do so in the near future even if the market drops by 50%.</p></blockquote><p></p>
[QUOTE="Brodiaga, post: 900890, member: 4967"] For guys in the accumulation phase who don't intend to start withdrawing their investments at least in the next few years (most of us), a significant market drop is a good thing. It's a buying opportunity because stocks are on sale. Consider two market scenarios for the next 10 years from now on. Let's assume you invest in a low cost mutual fund or etf which tracks the S&P500, such as VFIAX from Vanguard, and dollar cost average $1000 into this fund every month over 10 years. You don't plan to start withdrawing money at least 10 years from now. Scenario 1. S&P500 constantly grows at 4% per year. Small fluctuations, but no significant drops. At this rate, it goes up 42% in 10 years. Scenario 2. Over the course of 10 years, S&P500 drops 50%, then bounces back, then drops another 30%, then bounces back again. By year 10, it is at the same level as in Scenario 1: +42% above the current value. Which one would you prefer? Assuming other things being equal, I would prefer Scenario 2, because the same 1K/month will buy more shares when the index goes down. In the end, you'll end up with more shares/units of the fund you're consistently investing in and therefore a higher net worth as long as you don't freak out, sell low or try to time the market, but instead just keep dollar cost averaging consistently. Granted, there is no guarantee that the index will be much higher in 10 years or even that it won't be below its current level. Also, significant drops in stock prices may be caused by or occur around the same time as recessions. Recessions tend to cause many people to lose jobs and not be able to invest consistently. However, the purpose of this illustration is to show the math behind long term investment. Also, people are more flexible than mathematical models or excel spreadsheets. For example, if there is another market drop 10 years from now, an intelligent investor will know that it's not a good time to retire and start drawing down his savings. He will just keep hustling until the market goes back up again, let's say another couple of years, and then retire and adjust his asset allocation to be more conservative and less dependent on market swings. I have not sold any of my investments and not planning to do so in the near future even if the market drops by 50%. [/QUOTE]
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