This was inspired by an article entitled: How Great Is Dollar Cost Averaging? You Don't Know The Half of It
BUYING AND HOLD
The market is toppy, valuations are extended and the market leaders like Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) are stretched to all-time highs. Apple (NASDAQ:AAPL) is now in bear market territory. Is it time to buy Amazon and Facebook? Or, is it time to buy Apple?
Consider the 15-year period from 2000-2014. The Vanguard S&P 500 fund earned a 4.1% compounded annual growth rate (CAGR). During that same time period, the Vanguard Short-term Bond Index fund also returned a 4.1% compounded annual growth rate (CAGR).
But, that second investment had zero down years and the first investment had four down years.
Further, that stock investment had 7x the volatility.
Now, let's say you must invest $1,000 a month for the full term: Here are the two investments you can choose from: The same CAGR, one never had a down year and the other had several with extraordinary volatility.
Which do you choose?
It turns out: If you chose the bond index, your $100,000 would be worth $228,294.
If you chose the stock index, your $100,000 would be worth $352,202.
BUYING AND HOLDING
Here's what happened. While both investments over the long-term returned the same, a buying and holding strategy (as opposed to a one-time "buy and hold" strategy) allowed us to get in on some great prices.
You see, not all of the money that was invested in the stock fund averaged 4%. Some money went in after 2001 and 2002 and 2008 and 2011 when shares were extremely depressed and subsequently earned returns of +12%, +15% and +20% or more.
Josh Brown brought this article to my attention and he wrapped his own flavor around it, calling it, as only Josh could, "How to Make Volatility Your Bitch." Crass, yes, but at least the point was clear.
HOW DOES THIS HELP US?
Rather than buying a stock all at once, one variant of the information we just covered would be to buy a little bit at a time, but to make it systematic. No opinion, it's a metronome. Pick a day, pick a frequency and do it.
Here is a mind blowing reality I found when poking around the numbers. First, in that period there were about 180 months. If we break $100,000 into 180 equal pieces we're looking at about $560.
Now, if we took $100,000 and just bought the S&P 500 for those 15 years, we would have ended up with about $160,000. That's it.
But, if we did the most extreme thing possible, and delayed investing a large amount but rather bought just $560 in the S&P 500 every month for 15 years (which would eventually total to $100,000), it turns out we would have been left with about $170,000. That's more than the $160,000 we would have had by just plopping down the $100,000.
For those comfortable with numbers, you know that's totally absurd. We delayed investing by 15-years. Further, if we assume we got the average 3% interest on our cash balances, which of course we would since the money would be sitting in a brokerage account, the portfolio turned into nearly $200,000.
Now, I don't think delaying buying stocks for 15-years is exactly the goal here, and of course, that 15-year period had some oddities in it because 2000, 2001 and 2002 were down years, the point shouldn't be lost.
The goal is not to buy and hold but rather to be actively buying and holding.
When the market drops, for those of us that are buying and holding, low returns on stocks keep prices depressed and allow us an extended opportunity to buy more shares that should eventually rise. This also gets back to one of CML Pro's core philosophies: having the right mindset.
When the market tumbles, if we are buying and holding, our mindsets go from one of fear (which often leads to panic selling) to one of encouragement. We're getting investments we want to own for less.
To provide more insight into our investing philosophy, we're speaking with a few brokerages to try to make our actual CML Pro stock portfolio available to CML Pro members to view. We'll keep you posted on the progress.
WHY THIS MATTERS
This is critical information to know in order to really understand the landscape of the market. Then, to take it even a step further and to find the 'next Apple' or 'next FANG stock' we have to get ahead of the curve. This is what CML Pro does. Our research sits side-by-side with Goldman Sachs, Morgan Stanley and the rest on professional terminals, but we are the anti-institution and break the information monopoly that the top .1% have.
Each company in our 'Top Picks' is the single winner in an exploding thematic shift like artificial intelligence, Internet of Things, drones, biotech and more. In fact, here are just two of the trends that will radically affect the future that we are ahead of:
That chart plots the growth in 4G usage worldwide and how it will grow from 330 million people today to nearly 2 billion in five years. This is the lifeblood fueling every IoT and mobile device on the planet and CML Pro has named the single winner that will power this transformation. Then there's cyber security:
Market correction or not, recession or not, the growth in this area is a near certainty, even if projections come down, this is happening. CML Pro has named the single best cyber security stock to benefit from this theme.
These are just two of the themes we have identified and this is just one of the fantastic reports CML Pro members get along with all the visual tools, the precious few thematic top picks for 2016, research dossiers and alerts. For a limited time we are offering CML Pro at a 90% discount for $10/mo. with a lifetime guaranteed rate. Join Us: Get the most advanced premium research delivered to your inbox along with access to visual tools and data that until now has only been made available to the top 1%.
Thanks for reading, friends.