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No. of Recommendations: 1
"Buy-and-buy-and-buy" has been a very successful policy for the obvious reason that we have been in a bull market. However, is it such a good idea if we enter a bear market? Assume (1) that you have $1,000,000 in assets (2) you invest $100,000 each year for the next nine years (at the level pertaining at the year end) and (3) US equities in 2000~2010 follow Japanese equities 1990~2000.

Your original $1,000,000 would now be worth $486,000, but you are not worried about that since that is what happens sometimes with a "buy-and-hold" strategy. Much more interesting is what happens to the $900,000 you have steadily invested. Yes it has grown, but only to $932,000. That means that your total capital is just $1,418,000. Had you (1) taken all of your money out and put it into a high yield bank account at 5% amd (2) put the annual $100,000 into the bank account, you would have amassed $2,600,000 over the ten years - almost 50% more than the $1,900,000 you have put into the account yourself and significantly more than the $1,418,000 mentioned earlier.

Since you are sixty, these two scenarios present very intriguing situations for you. In ten years time you are 70 and presumably spending rather than saving. Assuming 5% is the prevailing interest rate then, with $1.4mil in the bank, you make $70,000 a year, which is nice but baulks in comparison with the $130,000 you make with $2.6mil in the bank. Still, since we are assuming a bear market, here, you may think that $70,000 is not bad for a "worse case" scenario.

However, let us take the Japanese analogy one stage further. Let us assume that as a result of a bear market in equities, the US economy suffers and US interest rates fall as their Japanese ones have done. So that when you are seventy, the interest rate is not 5% but 0.5%. Now look what happens. Your annual income from the two scenarios falls to $7,000 and $13,000 respectively. You will almost certainly be forced to run down your capital as Japanese pensioners are now having to do. Clearly, the $2.6mil goes further than the $1.4mil. (At $70,000 a year, the $1.4mil would all be gone by the time you are ninety.)

I am 35. If I follow your "buy-and-buy-and-buy" policy investing 10% of the amount I inititally start off with into a US bear market that resembles Japan's, by the time I am 45, I will have 141% of my original investment. (This includes the 90% put in over the ten years.) Assuming that for the next ten years the market goes up 5% a year and I continue this policy, that sum would itself have appreciated 60% and the money I invested during this time would have appreciated 20%. If I continue this again up to the age of 65, I will be able to retire with considerable capital appreciation.

So your advice is right for me, even if we enter a 10-year bear market. But, ironically, it may not be right for you. Certainly, the evidence from Japan is that you really should be considering putting the money in the bank from here on. If you lock in at 5% a year for 10 years, the $1mil you started with becomes $1.6mil and you will also gain from any further savings you make. You may be able to make more in the stock market than this, but you may make considerably less. This is not a problem if the economy is insulated from the stock market. However, if they are and interest rates fall - like they did in Japan in the 1990s and the US in the 1930s - you will want your capital to be secure and of a sufficient size to enable you to run it down without worry. Investing in the stock market does not allow you either of these.

I hope this is of help to you and of interest to others who have, like you, successfully avoided the pitfalls of selling too soon in the past. As I wrote, I am 35 and the sensible approach for me - bear market or no bear market - is to invest steadily and go with the punches. Your situation is somewhat different.
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