Taming the Rollercoaster

Taming the Rollercoaster Empyrion Wealth Management

What’s the best strategy for navigating choppy investment markets? The classic advice is to hang on for dear life — but is there a better option?

A recent article by Michael Batnick of Ritholtz Wealth Management helpfully reminds us that we have experienced two, very choppy market periods since 1999. Buy and hold worked decently, but not terrifically, during that time. If somebody had invested $10,000 in the S&P 500 in 1999 and held on through the dot-com crash and the Great Recession, he or she would have $29,800 today.

But somebody who invested according to the principles of dollar-cost averaging would actually have had a better investing experience. The accompanying chart shows how many shares a person would have purchased, each month, with a $100-a-month investment in the S&P 500. During the two major market downturns, Investor X is buying twice as many shares — at times when stocks are selling at a discount — than more recently, when stocks have become rather pricy.

S&P 500 Monthly Shares Chart Empyrion Wealth Management

Source: The Irrelevant Investor, 2019.

Of course, it takes courage to go buy when everybody else is selling. Don’t you lose money on your investment when you buy stocks and the market goes down that month? And the next? Of course you do. The next chart shows, in red, the times when your steady contributions result in temporary losses, and it also shows what happened, over the long term, for someone who followed through on the strategy.

Dollar-Cost Averaging Chart Empyrion Wealth Management

Source: The Irrelevant Investor, 2019

The bottom line: that buy-and-hold investor would have earned an average yearly return of 5.6% a year through two terrible bear markets and the long bull market that followed it. The investor who dollar-cost averaged through these extremely choppy markets would have earned 7.9% a year.

There is, of course, no guarantee that this or any strategy will beat the buy-and-hold investor’s returns. Dollar-cost averaging happens to be a terrific way to navigate especially choppy markets, where stocks are available at an extreme discount once or twice along the way.

Stay Diversified, Stay Your Course!

Empyrion Wealth Management (“Empyrion”) is an investment advisor registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. Information pertaining to Empyrion’s advisory operations, services and fees is set forth in Empyrion’s current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Empyrion. The information contained in any third-party resource cited herein is not owned or controlled by Empyrion, and Empyrion does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Empyrion of the third party or any of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner or investment advisor.

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