- The Worst Day of Our Investment Lives:
- Is the Coronavirus the next Black Swan Event?:For example, when the markets collapsed in September and October 2008, I wasn’t worrying at all. Why? Because I was a freshman in college and had no assets to my name.
But, that isn’t true anymore. Monday, March 9, 2020, made those record losses that I have read about for so long, come alive.
And now, for the first time, I am starting to understand why you can’t just tell people “Don’t panic because the market usually recovers.” Because reading about -7% days on paper or watching them on TV as a teenager isn’t the same as feeling the hurt in your pocketbook.
So what should you do? Am I saying that now is the time to take all that cash you were sitting on and dump it all into the stock market?
No! I would never say that, because that would be market timing.
If you’ve been following our Investment Workshop but waiting for a good time to start investing, here’s what you do. Take the cash you intend to invest, divide it up into 24 equal amounts, and invest each portion twice a month, once at the beginning, and again on the 15th. This is called Dollar Cost Averaging.
The reason why we do this is to manage your emotions. Stock market crashes are scary, and investing during a stock market crash is even scarier. If you’re sitting on a large pile of cash and you’re trying to hit the exact bottom in one lump-sump transactions, you’re going to freak out. Most likely, you’ll freeze, never invest, and miss your opportunity.
Dollar cost averaging is how you invest during a downturn because it spreads out your bets over a longer period of time. Remember that during the 2008 crisis, the S&P 500 took about 10 months to plummet from peak to trough. By using dollar cost averaging to get into the markets, you’ll be sure that at least some of your money will get in at the bottom and you won’t miss out on the best deals.