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Quote.com, 01/18/2001

Many people have asked me lately if now is still a good time to be investing in the stock market. Aren't stocks overvalued? Aren't we due for a correction, or worse, a crash? Won't the Y2K problem scare the markets? ?and so on. My answer to these questions is "Yes, and so what?"

My answer is based on over 20 years of following the market and studying the results and logic. And what all this tells me is the following:

1. Every investor should continually keep in mind that the long-term trend of the market is up. If this weren't the case, investing in the stock market might be no different than rolling the dice, and we know there is no comparison. On a short-term basis, there might be some similarities, but short-term money probably shouldn't be invested in stocks. A basket of stocks, like the S&P 500 Index, is a reflection of our underlying economy - energy, technology, capital goods, utilities, etc. - and it's clear our economy has a terrific growth bias to it.
2. Timing the market ? selling at a top and buying back in at the bottom is a myth. I know of no one who can successfully accomplish this consistently. Technical analysts and fundamental analysts have burned up computers trying to figure out how to do this. It's hard to be right twice on market movements; just ask Elaine Garzarelli. She is an astute market analyst who gained a lot of notoriety by calling the market crash of October, 1987, but she hasn't had much success with her calls lately. She has called for two other market corrections since, that I'm aware of, that haven't materialized. Donald Trump was another prescient investor who was written about in the press as having sold his stocks before the "Crash" in '87. But when did he get back in? He may be still in cash for all I know. If he didn't get back into the market right after the crash, he missed some of the best trading days of the decade. The market did an "about face" after the crash and began another strong move toward higher ground that continues today, twelve years later.
3. For a 401(k) investor, there is a powerful dynamic process called "dollar cost averaging" which is involved in your investment. You have probably heard the term before, but never realized, and no one ever explained, how important a process it is. Dollar cost averaging is simply the process of investing regular amounts of money at regular intervals. This process causes the investor to buy fewer shares when the market is dear and more shares when the market is cheap. Here is an example of the process investing $100 each month.

Average share price = $10 (40/4 = 10)
Your average cost = $8.57 ($400/46.67 = $8.57)

As you can see, after investing $100 each month or $400, your average cost of owning a share is less than the average price of the shares.

To give you some perspective of how powerful this dynamic can be, let me show you an example of dollar cost averaging through one of the most difficult times in our economic history, the Great Depression. You are probably aware of the "Crash of ‘29". This is probably the single most important day in stock market history. Not only did it conclude another great bull market run, but it also marked the beginning of one of the worst decades in our history. In the following example, I invested $1000 a year for ten years beginning in 1929 and concluded in 1938.

At the end of the decade, 1938, I had invested a total of $10,000 or $1,000 each year and my 401(k) statement showed that I had a balance of $10,592, a gain of 6% ($592/$10,000). Not terrific by any measure, until you look at the Dow Jones Average and see what happened there. It went from 311 in 1929 when I started investing and ended at 132 at the end of the ten-year period? a decline of 57%!! There you have it. The market was down by 57% at the end of ten years and I was up 6%. Not bad, considering the economic turmoil at the time.
Impact of Dollar Cost Averaging During the Great Depression

Imagine actually making money during one of the most horrific times in our history. If dollar cost averaging can help you do that, then what are you worrying about?