This week I have talked a lot about why I sold all my stock on Feb 20 and why I think the Dow Jones Industrial Average will drop to 15,000 (a 50% drop) before the end of the year. Does this mean I think you should sell because of the coronavirus? NO! NO! NO!
To make money in the stock market:
DCA. The only system that is 100% mathematically guaranteed to work is DCA – Dollar Cost Averaging.
Picking individual stocks. People who try to pick individual winning stocks virtually always lose their shirts. There is a reason why “day traders” don’t do this for long because at some point their luck runs out and they lose it all.
Timing the market. People who try to time the market virtually always buy high in a frenzy and sell low in a panic and end up losing their shirts. This corona-crash is such a time, do NOT panic sell.
The magic of DCA
If you are growing a retirement account, the best return is also the easiest to manage. Simply auto-purchase the same dollar amount every month or every paycheck, thats it. No timing, no switching funds, just hold the course. The best to invest in an index fund with very low management fees like Vanguard’s VOO ETF. Here is why this simple system will make you so much so much money. Say you had a crystal ball and could predict the future so that you could buy stock only when the price is low – you would get rich! Well this system isn’t quite as good as that crystal ball but a lot more reliable. With DCA you buy a lot more stock when the price is low and a lot less when the price is high. Lets take an example. Every month on the 6th you put $300 into your VOO ETF retirement fund, lets look at your last two months:
Feb 6, VOO price $305 – you bought 0.98 shares
Mar 6, VOO price $273 – you bought 1.10 shares
See how that works? You bought 12% more stock at the bargain price than at the high price! A system that works every single time! There is no 30 year period in the existence of the stock market where this system would have failed to make you an excellent return. I don’t care how much of a hot shot the fund manager is, none of them can claim this kind of consistent results.
So why isn’t Scooby using DCA?
Great question. I am within a year of starting to withdraw from my retirement accounts. My accumulation phase is over. As you get closer to retirement, you move to safer and safer investments and nothing beats cash. The stock market WILL recover from the corona-crash and zoom back up at some point. The problem is that it could take 3-5 years and I wanted my money out within the next 12 months. When I saw on Feb 20 that all inter-asia flights were being cancelled I knew that I had ridden the bull market up high enough and it was time to flee to the safety of cash.
Similarly, I did a video today about how I would reinvest if the DJIA drops to 15,000. This is simply because at that point, I would see it as a pretty easy way to double my retirement fund within a few years. Again, since I am in the withdraw mode from my retirement account I am more risk averse.