“Why would anyone keep investing when the market keeps going lower every day?”

Ramit Sethi · March 9th, 2009

A friend forwarded me these, and I wanted to share them with you. Don’t automatically discount them just because they come from a financial company. These are excellent.

Think carefully about where you want to be 10-20 years from now, investing-wise.

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The key takeaways:

  • If you believe the market will recover and grow over the long term, you need to be investing consistently
  • Whether you should be saving or investing depend on the time horizon of your money. If you need your money within the next 5 years (say, for a down payment), you should be saving it in a savings account. This hasn’t changed
  • If you truly believe that the next ten or twenty years will be “different” than history (or, admittedly, the same as the last 10 years) and there will be small, or no, returns, you have a few options: Stop investing, pull all your money out of the market (for some reason, many lay investors believe this is the only option), adjust your asset allocation, or extend the timeline of your dollar-cost averaging (i.e., instead of investing $300/month, invest $100/month)
  • If you believe that the market will recover and grow, keep investing. Feel free to adjust your investing timeline or any of the other factors above. But you recognize the importance of picking up shares consistently, since you can’t time when they’re high or low
  • From my book: “Recently, a group called Dimensional Funds studied the performance of the S&P 500 from January 1970 to December 2006, during which time the annualized return of the market was 11.1%. They also noted something amazing: Of those 36 years from 1970 to 1986, if you missed the 25 days when the stock market performed the best, your return would have dropped from 11.1% to 7.6%, a crippling difference.Now, if only we could know the best investing days ahead of time.”
  • If, however, you believe the news about how this time it’s different, you don’t invest, and then wonder why you only have what you managed to save over the next decade or two (say, a few thousand a year), you have nobody to blame but yourself. Our generation will almost certainly become increasingly conservative investors
  • The trick, of course, is that nobody will know for 10-20 years
  • No decision is a decision

It comes out Monday, March 23rd (2 weeks from now). Pre-order now.

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  1. the weakonomist

    If you believe that this current economic environment is some kind of game changer, then just get out of the market all together. I don’t want your paranoid schizo self talking about doom and gloom while I reap the benefits of the biggest discount on my retirement I’ll ever see.

    Every recession brings about fear, and the companies that can make money on your fear will make videos like this.

  2. Nate @ Money Young

    Ramit, thanks for the data. This is exactly why I continue to invest my money in the market. I can’t wait for the uptick. Patience is key.


  3. “From my book: “Recently, a group called Dimensional Funds studied the performance of the S&P 500 from January 1970 to December 2006, during which time the annualized return of the market was 11.1%. They also noted something amazing: Of those 36 years from 1970 to 1986, if you missed the 25 days when the stock market performed the best, your return would have dropped from 11.1% to 7.6%, a crippling difference.”

    This is an illogical argument. Do you see why?

  4. Stop Getting Cheated

    Ramit, I think this past year has offered one of the best climates for continued investing. Collective fear has hammered the market to discounts we may never see again. I have been heavy long in UYG, UWM and DXO. Both DXO and UYG were under $2/share. I know my view is not for everyone, but I think there is going to be a huge upside.

    Thank you for your excellent post.

  5. Adam @ Checkbook Diaries

    I agree that now is a great time to buy. It’s like the market is on a clearance sale. There are many companies out there whose stock value has suffered do to the market slide in general, and not as a direct result of poor business practices or profitability. I feel that it is also a great time to take a few low cost risks if you are a young investor. If you look at the airline sector you’ll notice that almost everything is down largely as a result in decreased travel spending due to the economic situation. Even looking at Ford and maybe GM (if you don’t think they’ll fail), the current cost of stock for those companies vs the potential reward once the economy rebounds is enticing. Especially if one of those companies fails and creates more market share and a stronger foothold for the other.

    It won’t happen overnight, but people who are investing right now stand to make a TON of money if they are in it for the long haul.

    BTW, I really enjoy the site and content (added you to my blogroll), keep up the good work.

  6. Whenever I hear people these days acting like it’s completely stupid to invest in the stock market right now because it’s “obviously going down every day”, I ask them why they aren’t just shorting the whole market. When they stare at me in confusion and ask what a “short” is, I know they have no idea what they are talking about.

    Then again, I also laugh at people saying it’s an “obvious” discount. No one can predict the future. The current price is just the current price, neither a discount or overpriced.

  7. Graffight

    video’s aren’t showing 🙁

  8. Neal Frankle

    A great piece to remind investors that perspective and understanding has to trump emotion if you want to stay on track financially.

  9. Enrique S @ The Corporate Barbarian

    I think this is a great time for discount shopping, but I haven’t changed anything regarding dollar-cost-averaging. I’m still investing the same amount each month, and hoping that I’ve picked the right strategy. My horizon is 15-20 years, so I’ll periodically re-evaluate my investment decisions as I grow older.

  10. Goal Hunter

    Ted: Tell us why the argument is illogical — I’m interested to hear. It’s pretty common knowledge that stock market returns are not normal, but have lots of “improbably large” swings.

    Ramit, your comments are spot on in when you qualify them by saying “If you believe … then …” but where do YOU stand?

    I believe that the recovery will come quick. It will come too quickly for most of the cautious investors who will miss some of those huge up-ticks. I think now is the time to put your money at risk — risk of a profit. I’ve moved money out of real estate to increase exposure to stock market.

  11. @The Weakonomist: I’m confused. You sound angry and argumentative, but appear to agree with the ideas from the documents. “Every recession brings about fear, and the companies that can make money on your fear will make videos like this.” They are trying to reduce the fear in this market… What are you getting at?

    @Ted: I agree with Goal Hunter. Show me the illogic.

  12. Jeremy Freelove

    I’m guessing Ted’s problem is that they are ignoring the potential benefits of also missing the 25 days when the stock market performed the worst.

  13. Goal Hunter

    Ted should not ignore the 25 worst days, only the 25 best days. When he tries to time the market here’s what happens:

    The bottom starts to fall out, so he sells.
    The stocks start to run up, so he buys.

    He banks all the surprise losses and misses out on the surprise gains.

  14. lump sum investing

    I’m not discouraging anyone from investing in the market, but this is nothing more than a biased marketing pamphlet. It appears to me that they’ve shown how a single time, lump sum investment performs over an arbitrary 32 year period. Who invests like that?

    How about the same analysis over a 10 year period ending in March 2009?

    Where do they account for gains through other investments made by the investors who sat out of the market?

  15. If, however, you believe the news about how this time it’s different, you don’t invest, and then wonder why you only have what you managed to save over the next decade or two (say, a few thousand a year), you have nobody to blame but yourself. Our generation will almost certainly become increasingly conservative investors

    Very timely! I was just pondering this question last night and wrote about it on my blog. What Lessons Will Today’s Youth Learn from the Economic Tragedy

    Great point in the NYT article that your investment should be based on your career. Intuitively, this is how my finances are run, but I didn’t think about it in those terms. My investments are conservative, and I keep a larger than average emergency fund because I work in IT. I may get a high salary, but I have to conserve more to make it through numerous turmoil. I won’t get a pension. Therefore, I have to save more. I also have to keep debt low because my career is much like a consultant’s – I have days of plenty and days of starving.

  16. rich

    I have 2 friends who both recently told me that they recently cut their 401k contributions. One was maxing out his annual contributions, and the other was putting 28% of his income in. They both dropped down to 4%. This move struck me as odd but they both insist it is the right move since their accounts have been dumping. I have always believed in dollar cost averaging and the fact that when stocks are cheap it is the best time to invest. I think some people get to emotionally tied to watching their investment accounts and fear that they will never recover. This fear gets the best of them and they miss out on great opportunity. I wish I was in a position to max out my annual retirement contribution limits, I would be all over it.

  17. Regarding #3 Ted,

    The part of the argument that confuses me (and possibly the reason for Ted’s question), is that it talks about a 36 year horizon from 1970-2006, then indicates results based on missing the best 25 days from only 1970-1986 (which only focuses on the first 16 years).

    I’m not sure why the argument doesn’t show the difference in earnings if you had missed the 25 best days throughout the entire 36 year period; unless of course those statistics would prove to be unremarkable.

  18. To me this is the same fallacy that financial companies have been shouting for years. Over the long term, the stock market will only go up. If you believe in the basic principles of the market you would see a fundamental flaw in this logic: if over the long term the market will only go up, then there is no risk.

  19. I’ve been putting every penny I can in the market since September. My portfolio is down 30+% if you only include ETF’s and large funds. It sucks, but I’m going to keep putting money in long term ETF’s. I view this as the opportunity of a lifetime. When in history have you been able to buy at a discount of 15+ years. For anyone in their 20’s who has only $1,000’s in the market, this is our opportunity. Even if the market goes down another 20%, 30 years from now, you will be in great shape.

  20. I already received a copy of your book from Amazon…. I thought it hadn’t come out yet. Strange!

    Great read so far!

  21. iSawYourBook

    Pre-order your book? I already saw it in the shelves of Borders in El Camino Real (in Santa Clara)

  22. I tell my friends and people I work with this each time they start freaking out about the stock market. If the Dow goes to 0, you’re going to have much bigger issues to deal with than the amount of money you lost in your 401k. I think it puts things into perspective – there are things you could lose that are much more important than a few thousand dollars of investment value. Instead of obsessing about whether or not the market is crashing, leave it alone, and focus on working your ass off to make yourself more valuable at work – just in case.

  23. Why S&P 500?
    Is it because it has the highest average return?
    What about international market like the hang seng index?
    Where can we learn these indices’ average return?

  24. Danielle

    I think a more useful example would involve parties that start out investing the same dollar amount each month.

    1) S&P 500 – continues to contribute the same amount per month
    2) S&P 500 – contributes $x more per month than they were before when the market drops 10%
    3) S&P 500 – Stops contributions temporarily anytime the market drops 10%
    3) 60% S&P/40% Bond – continues to contribute the same amount per month
    3) 60% S&P/40% Bond – Contributes $x more per month anytime the market drops 10%
    4) 60/40 – Temporarily stops contributions anytime the market drops 10%

    Personally these ideas all sound great, get the stock while its cheaper, but as one of the multitude of unemployed folks, I have had to redirect my funds elsewhere.

    For those who have friends pulling out of their 401K’s, ask them if they are using the money to create or bolster their emergency funds, because you really can’t argue with that!

  25. rupneu1

    Yeah, in the long run S&P500 index outperforms most of the managed or balanced funds. Some managers can beat the index by few points, but after tax and expenses, it’s probably the same. That is why I invest most of my money in index funds. I also try to pick some stocks myself, but so far I’ve been loosing a lot on those. At least, with the S&P index (SPY), I’m no worse off than the market!

  26. Generration Millionaire

    It seems people are always doing it backwards – buy high – sell low, dollar cost average in during the ups and downs – unless our total system fails – this is still your best option for keeping up with inflation and hoping for a secure retirement

  27. I’m with Danielle. Often, people comment about getting out of the market, etc. based on fear, but sometimes they are just using their resources differently. The past few months my extra income went to bolstering my emergency fund, but as soon as I’m re-employed and able to contribute again, I’m diving in.

  28. I’m confused by the point of the first article.

    Why would you ever sell if you were planning on buying back in when the market broke even???

    I don’t even have to run simulation on market to tell you that the last two will fail…

  29. In don’t understand why everybody is pointing to S&P 500 or DJIA as proof that the stock market always goes up. Why not take a look at how the Japanese stock market has fared in the last 20 years or so:

    The Nikkei index is trading at 20% of the value it had in 1989!

    This could very well happen to the US, especially since they are taking the same steps that led to Japan’s lost decades – not letting anybody fail, taking money from the efficient elements of the economy and offering them to failed banks and automakers, rewarding them in effect, for their inefficiency and incompetence.

    Just because something happened for the last 100 years (the US stock market going up), does not mean it will continue indefinitely.

    I’m not saying you shouldn’t invest. By any measure, this _is_ a good moment to invest, because after a 50% decline, your chances of making money in the market are considerably higher. But putting all the money you don’t need in 5 years into stock, is irresponsible advice. You might find yourself broke 20 years later wondering where you went wrong.

  30. It’s my feeling that your approach to discussing this topic has some key drawbacks. That isn’t to say you are necessarily wrong on a factual basis, Ramit. Your analysis is keen and rational. But the issue, in my view, with teaching people how to invest is that people are not rational; in fact very rational people approach investing in the market with their emotions first.

    I am not sure that your article addresses how someone overcomes the emotional component of investing continually as the market drops. People really need to feel comfort with their investing decisions as the market declines, and too often in my experience smart people — such as yourself — put forth rational cases that make sense “in the long run” but there’s no emotional support behind it. Benjamin Graham himself readily admitted to the passions that fuel investors’ actions and the level of stomach it takes to hold on while your stock’s value drops.

    Personally, I completely understand why so many have pulled out of the stock market. The drop has created a great opportunity for investors with stomach and extra cash to spend. But few people have those qualities, and in fact I suspect that will fuel a crisis of confidence in the market for some time.

    There’s a soft side to the question “why would anyone keep investing …”? How does someone keep investing after watching 40-50% of their money disappear in a few months, money they don’t have, money they might need if they were laid off? The answer isn’t charts or an appeal to reason or the long-term. The fact is most people need to be “coached” directly through these times; good financial advisers know this, they call whenever the market moves, but unfortunately they won’t be available for most people. I’d suggest as an alternative (just trying to be creative) that people who invest, even passively, form groups and help each other keep their resolve. It’s interesting in our society that people support and coach each other through personal tragedy, but not through something as basic as investing for retirement. It’s a thought, anyway …

    • Ramit Sethi

      I love your comment. I agree, too — investing is far from rational, and facts and data don’t often persuade as effectively as emotionally understanding what the person is going through. Thanks for your detailed thoughts, JMW. Have a great weekend.

  31. Weekly Dividend Investing Roundup - March 14, 2009 | The Dividend Guy Blog

    […] Why would you possibly invest when the market tanks […]

  32. Investing in the current economic environment is not for everyone. In fact, investing in the equity market is not for everyone at any given point in time. Everyone is different and thus their financial needs at any given point in time are different too. Depending on your investment horizon, short-term and long-term financial obligations, risk tolerance, career outlook, and many other specifics that only you know, is this invested at all times, dollar-cost average up and down market reverence the answer for everyone?

    End of the day, if you are holding on to your money and wondering if you should be investing in the market given the uncertainties, you’re facing two kinds of risks when it comes to investing. I think of it as committing either Type I or Type II error in statistical testing. So imagine the null hypothesis here is that investing in the stock market is a positive move right now. An alpha error is one of false positive, when you reject the null hypothesis when it’s actually true. So in this case, this represents a case of lost opportunities, when you’re outside looking in, wishing you were in the market and riding an upward swing. But the thing is, there are always more opportunities as long as you have capital and patience. The beta error is one of false negative. So this is the risk when you’re rejecting the idea of investing in the market now even though it is a good thing. So now you find yourself in the position of investing in the market and looking out, wishing you were not invested because you’re losing money. Would you rather be in group I or group II?

  33. The Masked Financier

    I’ve stated similar views on other posts before, but I think blind investing of money into the market is not a good idea.
    If the objective is to teach people how to be rich then there needs to be some effort to teach people how to invest wisely not only with respect to timing of getting money into the market, but how to invest. After all, Ramit’s method is simply a way of enforcing discipline onto an investor rather than subjecting oneself to the emotional trauma of the markets.

    As an example, one could make some effort to replicate a strategy like Warren Buffett’s in terms of getting money into the market i.e. only invest when certain criteria of valuation are met with respect to the whole market. This wouldn’t perhaps help an investor achieve WB’s returns, but it would probably help to outperform the general market indices and provide some downside risk protection. it would also do so in a mechanical way, a little like Ramit’s method but with some more intelligence.

    Just instructing people to blindly put money into the markets in a gradual way is somewhat irresponsible IMHO.

  34. financial planner

    If you don’t try to time the market, in other words, invest from the time you are 22 years old until you retire at 62 years old, you will be fine.

    Unfortunately, not many people do this, and studies show that investors put more money in at market tops (more money flowed into tech mutual funds in the first quarter of 2000 than any other quarter). So unless you have proven skill at market timing, your best bet is to invest consistently.

  35. Christophe Keller

    Hi Ramit,

    Any thoughts on ETF vs index funds? I read your book and would like to invest in index funds but I live in Europe (Belgium) to be precise and I don’t have access to Vanguard or Fidelity index funds as an individual. It seems however that I could buy ETF’s from those via an online broker or my bank. Oh yes in Belgium we don’t have capital gain taxes