Investing in bear market by dollar cost averaging

At times like these you may even admit that shares are probably pretty cheap now. But what if things get a lot worse?

Investing by dollar cost averaging can facilitate your investment appetite and your worry about the risk. The idea is that you put exactly the same amount of money into mutual funds or stocks every month or certain interval of time.

Choosing to dollar cost average strategy, you are giving up any attempt to time or catch the market bottom. Trying to catch the bottom is like attempting grasp a falling knife.

To see how dollar cost averaging might have helped an ordinary investor during the worst meltdown in history, Brett Arends looked at the Great Depression data from Ibbotson Associates. He looked at total shareholder returns, which includes reinvested dividends, for a basket of the top 500 companies on the market. He wrote the following results on the Wall Street Journal.

At the worst moment in the crash of 1929-1932, someone who dollar cost averaged had still lost about two-thirds of his or her money.

That is plenty scary. Terrifying, even. But before you bolt from your mutual funds, never to return, let me add several things.

First, these are the numbers for the unluckiest investor - the guy who began dollar cost averaging at the absolute worst moment in history, namely Sept. 3, 1929. Those who started later in the crash did at least slightly better.

Second, the performance in real terms wasn't quite as bad as it seems. That's because of deflation - the phenomenon of falling prices that helped cause the crash in the first place. A dollar in 1932 bought a lot more than a dollar in 1929: Average prices fell by about a third. So in real terms even the unluckiest investor - one who started in September 1929 - was only down, at the low point, by just over a half.

Third, they recovered fast. When the market turned, those who stuck quietly to their plan got repaid quickly. Forget that stuff about 1954. According to Ibbotson data, someone who dollar cost averaged was back on level terms by 1933. And by 1936 he had doubled his money (though the crash of 1938 then knocked him back to evens for a while).

Incidentally, while Wall Street plummeted 89% at its lows, overseas markets did not do quite so badly. They fell, overall, about two-thirds according to data from Philippe Jorion, an economics professor at University of California-Irvine. That's still bad, but it is very different from 89%.

It's an argument for sticking to regular investments through this crash: Not bailing, and not jumping in with both feet either. The simplest strategy worked; investing the same amount, every month. It's also an argument for investing globally, and not just in the U.S., which is a lot easier to do today than it was in 1929.


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