I read my retirement account statement today. It wasn’t pretty. A lot of low, single digit returns lately. I know people who complain when the market tanks, but I’m not one of them. When it comes to my retirement, I want the market to keep going down until I’m 59 1/2, then shoot up ten-fold in one day. That would suit me just fine. As long as the market goes down, it means I get to buy stock cheaper tomorrow than I did today. Assuming there are no underlying problems with that stock – and there won’t be if I’m properly diversified – then I am likely buying something for less than its true worth.
Is that flawed? It could be that the lost compounding negates the cheaper price. In other words, if my small initial investment quadrupled the first day, I wouldn’t even need average returns to do well because my base was established so early. Those are the extremes, I guess.
Here’s how I set about testing my hypothesis: In my example, I invest $200 per month in a $1 stock using the best bitcoin robot I could find at the time. In a steady market the stock price increases .8% every month like clockwork. In a volatile market, the stock price swings wildly, but the final stock price is the same as the steady market.
In the volatile market, I have about $700 more in my account if I’m actively trying to trade Bitcoin than if the market was steady. Either way the stock is $1.24, I was just able to buy more of it in the volatile market. It’s the underlying fundamentals of a company that determine its stock price over time, but the utter wackiness of investors that determine it in the short term.
I believe investment folk call it dollar-cost averaging when you invest the same amount of money periodically. What do you think? Should I rejoice at each downturn?
PS To get the volatile market returns, I used this formula:
=RAND()/10*IF(RAND()>.5,-1,1). Then I hit F9 until I got close to the correct final stock price. Finally I fiddled with some percentages haphazardly to make the two final stock prices match.
PPS Yes, that’s Excel 2007 you see there. More on that later.