Why Now Is a Good Time to Launch Your
Stock Market Strategy

If you're watching the market from the sidelines, we're eager to help you get a boost of confidence and take the plunge in setting up your investing portfolio. Some folks delay because they're waiting for "just the right time." The truth is that anytime is a good time for the long-term investor, and the sooner the better.

But what if you get started just before a major sell-off? It's true that your opening investment will take a bit of a hit, but your subsequent monthly investments will be gobbling up more and more shares as prices fall. Actually, if you won't be withdrawing your money for a decade or two, you actually should want bear markets to come along. That's when stocks temporarily go "on sale" and you get more shares for your money.

Let's say a young couple took our advice to heart at the beginning of 2000, just as the 1998-2000 bull market was peaking. They had saved up $3,000 in their IRA, and knew they would be able to add $300 a month going forward. They didn't know then what we know now, that the market would start moving down almost immediately, and would still be lower five years later. Specifically, the benchmark S&P 500 stock index, which began 2000 at 1,469 would close out 2005 at 1,248, down about 15% for the entire six-year period. Pity that young couple for taking our advice, right? Not at all.

The table below shows the theoretical results from their dollar-cost-averaging strategy (where the same dollar amount is invested every month regardless of market conditions) assuming their money was invested using SMI's Upgrading strategy.

[Note: The Sound Mind Investing Fund is managed similarly to our Upgrading strategy and is more convenient for smaller accounts and frequent deposits such as in a dollar-cost-averaging strategy. For more information, see Introducing the Sound Mind Investing Fund (SMIFX).]

Month after month, they invested their $300 regardless of what the headlines and "experts" were saying. As the table shows, the market treated them to a rocky start, losing ground more often than not. After one year, they had invested a total of $6,600 and their account value was just $6,329, meaning they were $271 in the red. Actually, that's not bad considering the S&P 500 had dropped a little over 10% that year, but obviously not what they had hoped for. They persevered.

Unfortunately, 2001 and 2002 brought more disappointment as the market dropped another 30%. However, due to the large number of shares they were gobbling up each month at discount prices, they were very well positioned for when the eventual market turnaround occurred. And sure enough, when Upgrading returned 46% in 2003, their account shot quickly into the black. It continued to grow as the market turned in modest gains over the next two years. By the end of 2005, although the S&P 500 index was lower than when they began their investing, they had an average annual return of 13.1% (taking into account the gradual month by month deployment of their capital). On total investments of just $24,600, they had gains of more than $13,400.

This example illustrates how dollar-cost-averaging helps minimize the damage from weak markets. By holding your monthly dollar amount constant, you buy more shares when prices move lower and fewer shares as prices move higher. In effect, you are buying more at bargain prices and relatively little at what might be considered high prices. This should help you to see that even a poorly timed beginning can still turn out pretty well. The bigger risk is that you never get started at all.

The time to begin a stock-oriented investing strategy is as soon as your foundation is laid—you're free of consumer debt (Level 1) and have a contingency fund to help protect you from the uncertainties of life (Level 2). The timing should not be determined by the experts' current thinking as to whether now's a good time to invest in stocks—they're as likely to be wrong as they are right. Besides, you don't want to make your decisions based on "outside-in" thinking, remember? You want to base them on where you are now, and where you need to go. So, if your foundation is in place and it's time to begin investing your monthly surplus, then now's a good time for you.

• SMI's Four Levels Approach to Investing
• Dollar-Cost-Averaging Explained
• Overview of SMI's Upgrading strategy
• Introducing the Sound Mind Investing Fund (SMIFX)
• SMI's Getting Started Portfolios page 

• Got a question or comment about this article? Discuss it on our Message Boards.