Comments on: Why You Invest When the Market Goes Down http://www.danvk.org/wp/2009-02-22/why-you-invest-when-the-market-goes-down/ Keepin' static like wool fabric since 2006 Sun, 05 Feb 2012 04:54:46 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: jb http://www.danvk.org/wp/2009-02-22/why-you-invest-when-the-market-goes-down/comment-page-1/#comment-17610 jb Tue, 24 Feb 2009 20:53:55 +0000 http://www.danvk.org/wp/?p=441#comment-17610 "there is a small but significant chance that none of your investment will ever be recoverable" If the entire S&P 500 index fails, we have much, much bigger problems than a return on our investments. For the S&P 500 to fall to zero we would essentially have to have a global catastrophe wiping out virtually all human life. “there is a small but significant chance that none of your investment will ever be recoverable”

If the entire S&P 500 index fails, we have much, much bigger problems than a return on our investments. For the S&P 500 to fall to zero we would essentially have to have a global catastrophe wiping out virtually all human life.

]]> By: danvk http://www.danvk.org/wp/2009-02-22/why-you-invest-when-the-market-goes-down/comment-page-1/#comment-17540 danvk Sun, 22 Feb 2009 22:52:35 +0000 http://www.danvk.org/wp/?p=441#comment-17540 Sam: I was imagining the prices here being for a pretty broad index like the S&P 500 or the Wilshire 5000. If a company in the S&P 500 goes under, that adversely affects the price of the index, correct? Sam: I was imagining the prices here being for a pretty broad index like the S&P 500 or the Wilshire 5000. If a company in the S&P 500 goes under, that adversely affects the price of the index, correct?

]]> By: Sam http://www.danvk.org/wp/2009-02-22/why-you-invest-when-the-market-goes-down/comment-page-1/#comment-17539 Sam Sun, 22 Feb 2009 22:36:27 +0000 http://www.danvk.org/wp/?p=441#comment-17539 You have overlooked things like survivorship bias, one example being that the companies which are currently listed on the falling index are not necessarily the same companies that will be listed on the recovering index. Your investments may become literally worthless, and although the "too big to be allowed to fail" mantra has much support within governments it has obvious theoretical limits. For your model to work you have to assume that you're investing widely enough to get total proper full-index coverage (ie shares in all the traded companies, probably via a managed index fund of some kind), and that you're able to buy into new listings at the same price as that at which your de-listed (insolvent?) holdings can be sold (ie low, or possibly zero.) Don't get me wrong - I like the buy-low-sell-high concept. It'd just be a shame if people thought that buying into a "low" market was sure thing. Never invest more into stocks than you can afford to lose. There is a small, but significant, chance that none of your investment will ever be recoverable. And as soon as you start picking companies rather than investing into a cross-index balanced-risk fund then you start playing a completely different game... be that for better or worse ;) As it happens - I have been investing (modest) fixed amounts into a pair of funds throughout the decline, and I hope to keep the investments up until we see a recovery. Do I think we are at, or near, the bottom of the market? No idea. Do I think my method will yield a good return? Or a better return than "cash under the mattress"? Again, No idea. But at least it gets done (its automated) and that is the massively overwhelming argument for this strategy in my book ;) You have overlooked things like survivorship bias, one example being that the companies which are currently listed on the falling index are not necessarily the same companies that will be listed on the recovering index. Your investments may become literally worthless, and although the “too big to be allowed to fail” mantra has much support within governments it has obvious theoretical limits.

For your model to work you have to assume that you’re investing widely enough to get total proper full-index coverage (ie shares in all the traded companies, probably via a managed index fund of some kind), and that you’re able to buy into new listings at the same price as that at which your de-listed (insolvent?) holdings can be sold (ie low, or possibly zero.)

Don’t get me wrong – I like the buy-low-sell-high concept. It’d just be a shame if people thought that buying into a “low” market was sure thing. Never invest more into stocks than you can afford to lose. There is a small, but significant, chance that none of your investment will ever be recoverable. And as soon as you start picking companies rather than investing into a cross-index balanced-risk fund then you start playing a completely different game… be that for better or worse ;)

As it happens – I have been investing (modest) fixed amounts into a pair of funds throughout the decline, and I hope to keep the investments up until we see a recovery. Do I think we are at, or near, the bottom of the market? No idea. Do I think my method will yield a good return? Or a better return than “cash under the mattress”? Again, No idea. But at least it gets done (its automated) and that is the massively overwhelming argument for this strategy in my book ;)

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