Things You'll Need:
- Pen
- Paper
- Calculator
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Step 1
First, be aware that it is a mistake to sell your mutual funds because the market has gone down. That would merely lock in the loss. It is far better to continue regular investments of the same dollar amount during market downturns, and perhaps even increase the amount invested at each interval.
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Step 2
As an example, let's say you have been investing for several years in a 401k or IRA for retirement with regular deposits of $500 a month, and you now have 1,000 shares at an average cost of $40 a share. So you have invested $40,000, but the market goes down and say your mutual fund share price is now $25 each which means your 1,000 shares are worth only $25,000. Don't sell and lock in a $15,000 loss! Your investment is for the long term and you can ride out market dips.
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Step 3
Continuing this example, suppose the share price stays at $25 for two years. Then you will have invested $12,000 ($500 a month x 24 months) and purchased another 480 shares. At the end of this period, if the price goes back up to $40 per share, You have 1480 total shares at $40 each, worth $59,200 (1480 x $40). Your total investment was $52,000 ($40,000 + $12,000), so you have made money ($9,200) by buying more shares when the price was low. That is, at a $40 price, $12,000 bought 300 shares but when the price went down to $25, $12,000 then bought 480 shares.
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Step 4
Make up your own examples and you will see that regular deposits of a given amount of money work in your favor when the market fluctuates. This is because that same fixed investment amount buys more shares when the price goes down than when the price goes up. This is known as dollar cost averaging. Dollar cost averaging makes you money as long as the fund returns to its long term average share price. Which for successful mutual funds, it always has or done better.
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Step 5
There are two main strategy choices in down markets. The first is to maintain your regular investment amount which will buy a greater number of shares and takes advantage of dollar cost averaging. The second, more aggressive strategy, is to increase your regular periodic investment amount in a down market to leverage dollar cost averaging even more. If you have faith in our long term economic outlook, the more aggressive strategy would make you more money.
