Why down Markets can be Good News for Mutual Fund Investors

It’s easy to get nervous when you take a look at the stock market and see lots of falling numbers. The natural reaction is to think, “Oh No! I’m loosing money in my retirement account! I’m going to be flipping burgers at McDonald’s when I’m 85 instead of sitting on a beach sipping Pina Coladas! Panic!”

But a falling stock market is not always a bad event. If you take a long term outlook on your investments, you can make a down market work for you and end up ahead in the end. But you have to be smart and patient with your investments. Don’t panic!

It’s true that when your mutual fund looses value per share, you loose value in your account. It’s simple math, no doubt. But where one person may see a loss, others see opportunity. From one point of view, the mutual fund that is down in value has just gone on sale! The shares are lower in price and can be purchased less expensively that they could have when they were higher priced.

For example, if you were to buy $1,000 worth of a mutual fund when it costs $20 per share, you would get 50 shares. Now lets say those shares loose value in a down market and are now worth $15 per share. If you were to buy another $1,000 worth of the fund, you could now get 66.6 shares at the new lower price, instead of 50 when it was worth more.

Over time, when the market recovers, as it is likely to do even in the worst of downturns, you have more shares, each of which “recovers” and you end up with even more value in your account than you otherwise would have had. The best way to build the number of shares you own and take advantage of price fluctuations is by investing fixed amounts at regular intervals.

This strategy of investing is called “dollar cost averaging”. To do this simply, invest $100 per month in a mutual fund, no matter what the price is at a given point. In months where the price of the fund is down, your $100 will buy more shares. In months when the price is up, you won’t get as many shares, but it won’t matter as the value of your investment is higher anyhow (including those shares you bought cheaply in the down times).

Of course, this example all depends on the mutual fund recovering its value over time. Although this can never be guaranteed, the stock market over time has traditionally always gone up in value. The amount of time it may take for this to happen depends on many factors and can not always be easily predicted. It is also possible that your particular mutual fund could be invested in stocks and bonds that will not recover, even if the general market does.

Because of the above risks, it is always important to know how much risk you are willing to take. You must also keep a close eye on the mutual funds you have. If it consistently performs badly, despite the general market doing OK, it may be time to get your money out and put it somewhere else. A mutual fund that consistently performs badly is not going to make you money, no matter what your investment strategy may be.