By: Gene Walden, Senior Finance Editor January 04, 2016
Even if you’re a seasoned investor, a quick glance through the latest financial news is enough to give you pause.
Where are the markets heading? How about interest rates? Is my mutual fund diversified enough? Is this a good time to buy a bond fund? Should I sell some stock funds now and hold the cash to invest later at a lower price? How will I know when to trade? These questions plague all types of investors. Let's see if we can clear the air by taking a look at the long view of the market.
The Long View
Historically it has paid to stay invested through the various market ups and downs: the stock market has trended upwards over the long haul and it is notoriously difficult to predict when the market is going to change direction. The financial crisis of 2008 saw the Standard & Poor’s 500 Index® (S&P 500®), a collection of the largest and most recognizable U.S. companies, plummet to a low of 676.53 on March 9, 2009 only to rebound over 200% to 2043.92 by December 31, 2015.
The Best Days
Stepping out of the market for even a short period of time can have a lasting impact. Take, for example, the recent 20-year period from 1996-2015. As the chart shows below, based on the S&P 500 Index, even if you missed only the 10 best days, your portfolio would be lagging by 50% when compared to buying and holding. That’s 10 days out of a period of 7,300 days. If you missed the best 30 days in this period, your returns would be 80% lower than if you’d simply remained invested in holdings of the S&P 500. Keep in mind that this timeframe also contained two significant market downturns that impacted returns—the dotcom collapse of 2000 and the financial crisis of 2008.
Dollar Cost Averaging
If you’re investing in mutual funds for the long-haul, there’s an easy technique you can use to help put your money to work at regular intervals. It’s called dollar cost averaging1. You simply purchase the same dollar amount ($100 in the example below) in your mutual fund account every month or quarter. Sometimes the cost of the shares will be higher or lower, but over time, you will have an average purchase price, reducing the risk that you invested a large amount all at once at the wrong time.
Reinvesting Dividends and Capital Gains
If you stay invested throughout various market conditions and you own mutual funds which periodically pay dividends and capital gains, you’ll generally keep receiving these payments as you remain invested. If you set up your account so these payments automatically reinvest, you’ll purchase additional mutual fund shares and build your holdings without having to add more cash to your account. Like dollar cost averaging, reinvesting dividends and capital gains can occur automatically at regular intervals depending on the fund you are invested in.
Putting it All Together
If you want to keep your investments working for you, choose a well-diversified portfolio that suits your individual risk tolerance. Thrivent Mutual Funds can help you diversify across a broad array of investments types with actively-managed funds. We can help you leave the noise of daily market movement to the talking heads on cable news—you’ve got two useful tools in dollar cost averaging and dividend and capital gains reinvestment. When you choose to invest with Thrivent Mutual Funds, you'll benefit from the expertise of our investment professionals and the convenience and choices we provide to make investing easier.
1Dollar cost averaging does not ensure a profit, nor does it protect against losses in a declining market. Because dollar cost averaging involves continuous investing, investors should consider their long-term ability to continue to make purchases through periods of low price levels.
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