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No. of Recommendations: 9
"Invest through thick and thin, dear Fool. Don't bother timing the market."

I agree, sort of.

Dollar cost averaging is often cited as a basis to keep on investing during bear markets. For those in the accumulation phase of their investing careers, that's certainly true. But once you have made your money in the market, it's a different story. Consider two investors, Young Fool and Old Fool.

Young Fool, through regular 401K contributions of, say, $400 an month (plus a little help from a rising market) has accumulated $50,000 when, suddenly, the market starts going in the tank like it did in 2000.

Young Fool does the right thing and continues to to add $4800 a year to his account through 2000, 2001, and 2002, meaning he has maybe $40000 in the market at higher prices to which he has added $14,400 at lower prices. When the market comes roaring back (it always does, as your chart indicates), Young Fool will cackle with glee about those shares he bought on the cheap during the bear market.

Old Fool knows the drill. He dillegently saved for 40 years, reinvesting his assets in tax exempt accounts accumulating a nest egg of $1,000,000. Ever the frugel one, he continues to put $900 into his account every month in anticipation of his upcoming retirement.

But guess what? He isn't retiring as soon as he thought he would. He got caught in the 2000 - 2002 bear market and his $1,000,000 became $600,000, supplemented only by another $30,000 or so in contributions during that time period.

The martket comes roaring back, but Old Fools shares bought during the Bear Market are much smaller in relation to his capital than Young Fool's Bear Market purchases, because, while his net worth when the Bear Market started was 20 times Young Fool's, his income was not 20 times Young Fools, so he couldn't contribute the same proportionate amount to repair his existing position.

Bottom line, dollar averaging through bear markets and staying fully invested is smart for the young fools, but it can be disasterous for the old fools, as a cursory look at the Dow Chart you posted reveals. If you are an old fool and fully invested in 1962, you are gonna run out of money and time before the market makes you whole.

Both Young Fool and Old Fool had the same market to work with from 2000 to 2003, but for Young Fool, the market break was an opportunity, for Old Fool it was a disaster. Making big positive returns when you have small amounts on the table only to give these returns and more back when you bet big against a bear market is called a "bad sequence".

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