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Buy, don't sell, in down markets

By Mary Holm

Monday 13th May 2002

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Share investors shouldn't bail out in bad times. I've made this point before. But, from the tone of some letters I've received recently, it needs to be repeated.

One man, for instance, writes that the $30,000 he invested in an international index fund is "now worth $24,000 after two years, and still dropping".

And his investments in other share funds, much of it in international shares, "are continuing to decline in value, in spite of their reports all suggesting that 'we've turned the corner and things can only get better.'

"I realise that with shares one is in for the long haul, in my case 11 years to retirement.

"But do I believe the 'spin doctors' who tell me things are O.K., or do I believe the evidence of a market that continues to fall? What should this non-expert do?"

Probably buy more units in the share funds while they're relatively cheap.

I realise that might take too much of a leap of faith. The fact is, though, that if you sell now you will have committed an investment sin: buying high and selling low.

If you stay in the market, the value of your investments will rise. When? And by how much? Nobody knows.

But if you're not ahead - and probably well ahead - by retirement, you'll be extraordinarily unlucky.

Keep in mind, too, that you would be silly to get right out of shares on the day you retire.

You're likely to live for a couple more decades after that, so it's best to leave a good portion of your retirement savings in shares until you get to within, say, eight to ten years of using the money.

For some of your savings, then, the time horizon is 20 years or more.

I admit that the current world share slump is unusually long and rather discouraging.

That, however, makes it all the more likely that the market will suddenly boom. And people who jump in and out of the market may miss out.

One piece of research looked at annualised returns in March 1991 to March 2001 on America's S&P500.

Given that US shares are more than half the world's shares, by value, it gives you an idea of how the world market behaves.

If you stayed invested in the S&P500 for all 2529 trading days in that period, you would have made a very healthy 13 per cent a year.

If you nervously ducked in and out of the market, and happened to miss just the five best trading days, you would have made 11 per cent.

And if you had missed the 30 best days, out of more than 2500, your return would have been a mere 4 per cent.

Not many would, of course, be that unlucky. But Nervous Nellies could easily miss many best days.

I'm not saying a boom is around the corner. They're impossible to predict. But it might be.

In Japan, a lousy share performer for years, the Nikkei index rose 16 per cent in the month to March 15.

That's extraordinary growth. Keep that up for a year, and a $1000 investment would turn into nearly $6000.

Who knows when that could happen to the markets in which you are invested?

And because share growth spurts over the long run more than cancel out slumps, shares are still the way to go for long-term investment.

Let's look at a $10,000 investment from December 1969 to December 2001.

- In New Zealand bonds, with reinvested interest, it would have grown to nearly $155,000.

- In New Zealand shares, with reinvested dividends, it would have grown to nearly $340,000 - more than twice as much.

- In world shares, with reinvested dividends, it would have grown to more than $580,000 - getting on for twice as much again.

Convinced?


Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached at maryh@pl.net

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