Wednesday, 29 October 2008

Investing in the market or in the movements of the market

How do you react to the present market crisis? Would you sell or stay put?

Uncertainty often clouds judgement, sending even the best of us into panic and gloom. But history shows that negative events do not necessarily spell doom for investors.

Historical evidence suggests that most investors can benefit by staying put in a severely sold down market.

Some investors are skilled at anticipating market movements. They would buy on ups and sell on downs. But how many people can do that consistently? (Observe investing here and make your own conclusions: http://fusioninvestor.blogspot.com/ )

The big question for many of us is whether it makes sense to stay invested regardless of market fluctuations. According to a study by Ibbotson & Associates, the anwer is "yes".

They found that a dollar invested in the S&P 500 in 1925 grew to $1371 in 1996. That's a compound annual return of 10.6%. But when the best 35 months (less than 4% of total time invested) were removed from the analysis, the same dollar grew to only $12.50, a compounded annual return of only 3.6%.

$ invested in S&P 500
$1 invested in 1925
Value in 1996 (stay put throughout) $1,371.00
Value in 1996 (minus 35 best months $12.50


So, unless you are confident of accurately predicting the best and worst months for your investment dollar, stay put.

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