Thursday, October 01, 2009

How Investing into the Crash Worked for Us

Throughout the stock market melt down we kept our stock positions and even invested more money in stocks. We did this across our portfolio, but the ultimate results of this strategy are most visible in my 401(k). I max out my 401(k), every year. This is not discretionary, it's something that I must do to ensure that my wife and I are economically secure when it's time to retire.

The nice thing about 401(k) contributions is that they happen every two weeks like clock-work, meaning that you invest regardless of whether the market moves up or down. Market timing is not a factor. As the market fell, my existing portfolio fell hard, but my new contributions were purchased at a huge discount. When the eventual rebound came, those discounted purchases more than off-set the original losses.

I only started contributing to my 401(k) plan in May 2008, and suffered through the worst of the bear market, but as of last Friday, my 401(k) was solidly in the black, as you can see in the chart below.

Of course, this is only the case because my regular contributions were large relative to the funds already invested, but still, I think this gets the point across: buying buying low pays off when the market turns around. If I shifted to a more conservative stance following the declines, my 401(k) portfolio would not have been above water today.

BTW, the pic may be a bit too small to make out the details, so here here's a quick guide: the blue position is an S&P 500 index fund; orange is an international stock fund; yellow is a REIT fund; and green is a bond fund. My allocation is 70% for S&P and 10% for each of the other funds. I re-balance quarterly. The regular jagged line shows the bi-weekly contributions and their cumulative value.

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Rob Bennett said...

As the market fell, my existing portfolio fell hard, but my new contributions were purchased at a huge discount.

At a discount to what?

I of course know what you mean. You mean that you made purchases at a discount to the earlier prices.

But what if the prices both before and after the drop in prices were too high? Then you made a poor long-term choice before the price drop and another poor long-term choice after the price drop.

You need to know the value of the stocks you are buying to know whether you are making good decisions. Stocks purchased at good prices (not relatively good prices but genuinely good prices) always provide strong long-term returns. Stocks purchased at poor prices do not.


Matthew said...

Why did your cost basis fall after a single pay period at the end of 2008?

Shadox said...

Rob - we have a basic disagreement here that we have previously heavily discussed. I am of the belief that this is not a productive strategy, and you believe differently. Plurality of opinions is a good thing.

Matthew - good eye! There was an over contribution by our HR team, so they pulled out the funds. Yeah, we have a good HR team...

Rob Bennett said...

Plurality of opinions is a good thing.

At least we are in strong agreement re that one, Shadox.


stephane said...

just curious , what software did you use to get this graph ?
did you do it manually with a spreadsheet or else ?

Shadox said...

Stephanie - I used Quicken to generate the graph. I use Quicken to manage all of our accounts in one place. The nice thing is: it's all automatic. All the transactions are pulled from the web, the graphs are generated automatically, and I can customize them however I wish.

I think I'll do a post about my Quicken use. You can also check out this page I created about my Quicken usage.

Anonymous said...

I'm quite surprised to see that you have 70% for the S&P500 index and the rest only account for 10% each.

I understand that for such long term the S&P500 index is bound to do better than bonds however foreign/emerging markets have a good chance of doing as well if not better.

What about plays such as Small-Value, Foreign REIT, High-Yielding Equity, Private Equity, Frontier Marktes, Intl SmallCap and MicroCap? All these could outperform the S&P500 and, provided that they don't, would most likely decrease volatility.

Personally, I would have balanced all your products equally: 25-25-25-25 if you are just using four. With the variety of funds/ETFs out there, I don't see why you wouldn't want to have a far more eclectic portfolio - I look at mine that has 10 asset classes and 22 funds.

Shadox said...

Anonymous - Actually, that's a very good point. I should have mentioned that I try all of our investments accounts as a single portfolio. So while you may think that our portfolio is too heavily weighted on large caps (i.e. the S&P), this only representative of my 401K account. Other accounts are balanced differently to off-set this.

I will try to do a post about our over-all asset allocation at a later time.

The reason I chose the S&P 500 index fund is because this is the only low cost index fund available in my 401K. I am very big on reducing portfolio costs - which in itself is a whole new topic in its own right.

CW said...

A beautiful play and a smart post on the fundamentals of Dollar-Cost-Averaging in any market. Well Done.