The Smartest Way To Invest In Stocks If You Believe The Market Will Keep Crashing

Financial markets have started 2016 in turmoil, with aparticularly disastrous Friday seeing US stocks sharply down.

Fortunately for investors, there’s a smart, time-tested way to keep investing even in the face of a crash, as long as you have a good long-term perspective.

There’s a correct way to buy stocks if you’re convinced the market will crash

The stock market is great for investors who have the benefit of long-term investing horizons. It’s also better suited for investors who aren’t concerned about perfectly timing market tops and bottoms.

Having said that, taking a longer-term view is good for investors who are worried they may be buying at the top of the market.

A classic strategy called dollar-cost averaging can help reduce risks surrounding an asset falling in price. The concept is straightforward — you invest a fixed amount of money in an asset once every fixed time period. If the asset’s price drops, you will be getting more shares of the asset for the same amount of money, and so if and when the price recovers, you will have spent less per share, on average, than if you had bought the shares at their peak pre-fall price.

Dollar-cost averaging isn’t about losing money as the stock market falls. It’s about buying increasing numbers of shares at lower prices, which means bigger returns during the rally.

How dollar-cost averaging worked brilliantly during the most recent crash

To see this in action, we came up with a simplified thought experiment.

We considered what would have happened to an investor jumping into the stock market at the latest peak: October 2007. This was arguably the worst time to buy. Our hypothetical investor puts $50 into an S&P 500 index fund at the start of every month, starting in October 2007 — the most recent stock market peak before the beginning of the Great Recession.

Here is what happened to the S&P 500 starting at that peak:

spxBusiness Insider/Andy Kiersz, data from Yahoo Finance

The index dropped more or less steadily until the worst moments of the financial crisis in fall 2008, causing the full-on crash, and it began to turn around only in March 2009.

The key to our investor’s experiment is that the investor is staying consistent. No matter how stock prices move, the person will always put $50 into the index fund on the first trading day of every month.

Based on changes in the value of the S&P 500 index, we calculated our investor’s price return, less the $50 monthly cost:

value less costBusiness Insider/Andy Kiersz, data from Yahoo Finance

The value of our investor’s portfolio as of January 4, 2016, is $7,066.62. If the person instead had taken his or her $50 each month and held it as cash, the investor would have just $5,000. So, the price return on this investment — even though the person started at a peak, just before the market started to go downhill and even with the recent market volatility — is $2,066.62.

This is a respectable 41.3% return. That averages out to about a 4.3% annual rate of return.

To get another perspective on this, here is the percent gain or loss, compared with taking $50 each month and holding it as cash:

percent changeBusiness Insider/Andy Kiersz, data from Yahoo Finance

Things start out looking pretty dire, as the economy fell into its deep recession through mid-2009, with the S&P 500 reaching a minimum in March of that year. At the lowest point for our investor, at the start of February 2009, the person would be down about 36%.

Because humans are often overly averse to risk, our hypothetical investor might have been tempted to abandon the investment plans during the bad months. That is, the person might look at this chart and panic about the drop:

percent change down arrowBusiness Insider/Andy Kiersz, data from Yahoo Finance

But if our investor sticks with the plan and keeps putting $50 in every month, even through the dark times, once the market bounces back, the person ends up doing quite well:

percent change up arrowBusiness Insider/Andy Kiersz, data from Yahoo Finance

Here’s why you never hear about this

Unfortunately, dollar-cost averaging isn’t sexy. It’s much sexier to sell at the top and buy at the bottom.

Obviously, your returns would be much higher if you win the stock market lottery by perfectly timing the tops and bottoms of the market. But nearly all the people who try to do this will find themselves losing money and lots of it.

If you are investing for the long haul and can hang on through watching your portfolio’s value drop temporarily in bad times, starting to invest in stocks, even near a peak, may not be as terrifying as it looks. The market has always bounced back sooner or later; so if you can hold on until that later, don’t panic.

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About the Author: Business Insider

  • Aaron Ruter

    What did you do for 40-50 years? I mean, what was your career?

  • JohnDille

    FOR THE LARGE MAJORITY OF MY LIFE… YES! BUT I NO LONGER CARE. THE A HOLES WHO FORCE A SOLID MAJORITY OF ALL WORKERS TO WORK FOR NEXT TO NOTHING… OR FOR LESS THAN NOTHING… CAN TAKE THEIR JOBS AND STUFF THEM YOU KNOW WHERE… OR GET OFF THEIR LAZY REPUBLICAN REAR ENDS AND ACTUALLY DO THE WORK THEMSELVES!!! OR HIRE EVEN MORE ILLEGALS THAN THOSE GREEDY AMERICA HATING REPUBLICANS ALREADY HIRE!!! I LIVE PRETTY MUCH ON SOCIAL SECURITY, AND MAKE A LITTLE MONEY TRADING MY WIFES 401K…. BUT THAT IS… IN EFFECT… NOT ACTUAL INCOME BECAUSE WE RARELY WITHDRAW ANY OF THAT MONEY. MOSTLY THAT IS FOR HER AFTER I START FEEDING THE WORMS! SHE STILL WORKS, MOSTLY BECAUSE IT GIVES HER SOME SPENDING MONEY… BUT HER WAGES ARE TOO LOW TO DO EITHER OF US MUCH GOOD. AFTER THE COSTS OF GETTING BACK AND FORTH TO WORK AND ALL THAT KIND OF THING ARE FACTORED IN, SHE DOES NOT EVEN CLEAR 20 DOLLARS A DAY!!! LIKE NEARLY HALF OF ALL AMERICANS, SHE WORKS ESSENTIALLY FOR NOTHING… JUST LIKE I HAVE FOR AT LEAST 40 OF MY 50 PLUS WORKING YEARS!

  • Aaron Ruter

    Are you a low-income person?

  • JohnDille

    THE POINT OF THE STORY ABOVE WAS THAT ONE GOOD WAY TO DEAL WITH DOWNTURNS IN THE MARKET IS TO DOLLAR COST AVERAGE. WELL… THAT IS EXACTLY TRUE… MOST OF THE TIME. BUT…AS I TRIED TO POINT OUT… DOLLAR COST AVERAGING REALLY ONLY WORKS WELL FOR THE WEALTHY… BECAUSE THEY CAN AFFORD TO WAIT UNTIL STOCKS ARE AT OR NEAR THE BOTTOM TO BUY, AND ALMOST CERTAINLY CAN AFFORD THE ADVISORY PROFESSIONALS WHO CAN TELL THEM WHEN THE BOTTOM IS NEAR…. AND MOST IMPORTANT OF ALL… THEY CAN ALMOST ALWAYS AFFORD TO BE WRONG! THEY CAN BUY IN TOO EARLY… AND SIMPLY WAIT OUT THE BOTTOM. NONE OF THE REST OF US CAN DO THAT ON A SIGNIFICANT SCALE… AND THE LOWER INCOME PEOPLE HAVE, THE LESS ABLE THEY ARE TO DO ANY OF THAT. YOU SEEMED TO SUGGEST THAT LIBERALS CAN DO THIS JUST AS WELL AS REPUBLICANS CAN… AND THAT IS TRUE…. EXCEPT REPUBLICANS HAVE FAR FAR MORE INCOME AND WEALTH THAN LIBERALS GENERALLY HAVE. OR… MORE PRECISELY… MOST OF THE REALLY WEALTHY PEOPLE IN AMERICA ARE CONSERVATIVES AND REPUBLICANS…. ALTHOUGH A MAJORITY OF THE LOWEST INCOME PEOPLE IN AMERICA ARE ALSO REPUBLICANS. ALL OF THIS IS OF RATHER GREAT IMPORTANCE BECAUSE THERE ARE SEVERAL MECHANISMS BUILT INTO OUR ECONOMIC SYSTEM THAT FAVORS THE WEALTHY… AND THIS DOLLAR COST AVERAGING CONCEPT IS JUST ONE OF THEM. AND IT RANKLES ME WHEN WEALTHY PEOPLE SAY THAT ANYONE CAN USE THE MECHANISMS THAT THE WEALTHY USE TO DO WELL IN LIFE… BECAUSE THAT JUST IS NOT TRUE!!! AT LEAST NOT ON A SIGNIFICANT SCALE! SURE… LOW INCOME PEOPLE CAMN SAVE AND INVEST A FEW HUNDED DOLLARS A YEAR…. BUT SUCH SAVINGS WILL RARELY ADD UP FAST ENOUGH TO MAKE IT POSSIBLE FOR THEM TO REALLY CHANGE THEIR LIVES FOR THE BETTER!

  • Aaron Ruter

    I’m not sure what you’re talking about, John.

  • JohnDille

    SO… YOU CAN’T READ??? NO SURPRISE, THERE! AND YOU KNOW NOTHING ABOUT EVEN BASIC ECONOMICS??? AGAIN, NO SURPRISE! AND WHAT HAS THIS TO DO WITH LIBERALS??? SOME LIBERALS ARE QUITE WEALTHY… AND GUESS HOW THEY GOT THAT WAY??? THEY… AND PROBABLY THEIR PARENTS… AND GRAND PARENTS… AND GREAT GRAND PARENTS GOT LUCKY ENOUGH TO BUY INTO WHATEVER ASSETS THEY USED TO GET WEALTHY, AT THE RIGHT TIME. AND THEY MANAGED TO KEEP GETTING MORE WEALTHY BY THE WISE USE OF THEIR WEALTH! THE PROBLEM IS… AS SHOULD BE OBVIOUS FROM MY COMMENTS ABOVE… IF YOU COULD ONLY READ… THAT THE SYSTEM IS RIGGED IN FAVOR OF THE WEALTHY! DEMOCRATS TAX THE WEALTHY VERY HEAVILY, IN ORDER TO RECYCLE A BIG CHUNK OF THAT WEALTH, AND TO PROVIDE BENEFITS IN THE FORM OF BETTER INFRASTRUCTURE AND MORE JOBS AND BETTER PAY… IN ORDER TO HELP EVEN THE PLAYING FIELD, AND TO KEEP THE RICH FROM GETTING TOO RICH AND POWERFUL. REPUBLICANS… BEING GREEDY SELFISH ARROGANT CRIMINALS AND FASCISTS AND TOTAL MORONS, DO NOT UNDERSTAND EVEN BASIC ECONOMICS ENOUGH TO KNOW THAT CUTTING TAXES FOR THE RICH SO MUCH… AS REPUBLICANS HAVE DONE OVER THE LAST 35 YEARS… HAS TOTALLY PERVERTED THE WILDLY SUCCESSFUL SYSTEM THAT DEMOCRATS CREATED… AND PUTS US SOLIDLY ON A PATH TOWARD BECOMING THE OLIGARCHY THAT REPUBLICANS HAVE ALREADY CREATED… AND ONTO A PATH THAT CAN ONLY END WITH THE RELATIVE FEW OWNING AND CONTROLLING EVERYTHING AND EVERYONE… IN A MODERN FUEDAL SOCIETY! GIVE THE RELEVANT FACTS TO A REASONABLY INTELLIGENT 4TH GRADER, AND HE OR SHE COULD TELL YOU EXACTLY WHERE WE ARE HEADED! GIVE THOSE EXACT SAME FACTS TO A TYPICAL AVERAGE REPUBLICAN… IF YOU CAN FIND A REPUBLICAN WHO IS ACTUALLY SMART ENOUGH TO HAVE AVERAGE INTELLIGENCE…. AND THEY WILL REMAIN TOTALLY CLUELESS… BECAUSE… HEY… REPUBLICANS ARE MASTERS OF BEING CLUELESS IDIOTS!!! AND THEY SEEM TO BE VERY PROUD OF THAT!!!

  • Aaron Ruter

    Do you think there are liberals that buy stuff on the cheap? Again, your bashing liberals. I take pride at buying stuff on the cheap. If YOU, John Dille, are forced to sell “at or near the bottom” maybe you’re in the wrong game.

  • JohnDille

    DOLLAR COST AVERAGING WORKS GREAT… IF YOU ARE RICH ENOUGH TO HAVE THE MONEY NEEDED TO KEEP BUYING EVEN WHEN YOUR STOCKS AND OTHER ASSETS ARE WAY WAY DOWN. MOST PEOPLE ARE NOT RICH ENOUGH TO DO THT… WHICH IS THE REAL REASON WHY THE RICH KEEP GETTING RICHER WHILE EVERYONE ELSE JUST SRUGGLES TO SURVIVE. MOST PEOPLE ARE FORCED TO SELL… AT OR NEAR THE BOTTOM… JUST TO RAISE THE CASH NEEDED TO COVER THE COSTS OF A LAY OFF OR OTHER TOUGH BREAK…. AND, OF COURSE, THE RICH SCOPP UP THOSE ASSETS ON THE CHEAP…. AND MAKE HUGE PROFITS WHEN THINGS RETURN TO NORMAL! RINSE AND REPEAT, OVER AND OVER AND OVER AGAIN…. AND THOSE WHO HAD THE MONEY TO WORK WITH BECOME MILLIONAIRES AND BILLIONAIRES… WHILE ALL THE REST OF US KEEP HAVING TO WORK FOR NOTHING…. BECAUSE INVESTING YOUR WAY OUT OF POVERTY REALLY ONLY WORKS WELL FOR THE RICH! YOU WORK… AND ONE WAY OR ANOTHER, THE RICH WILL STEAL… LEGALLY OF COURSE, PRETTY MUCH EVERYTHING YOU HAVE EARNED OR HAVE MANAGED TO SAVE AND INVEST!!! DON’T BELIEVE IT???? JUST STUDY FEDERAL INCOME TAX DATA AVAILABLE GOUING BACK A HUNDRED YEARS. YOU CAN SEE THIS SCAM BUILT INTO THE WHOLE ECONOMIC SYSTEM, JUST AS PLAIN AS DAY!!!