Why down Markets can be Good News for Mutual Fund Investors

After the week we’ve had in the market, it’s easy to panic and to sell, or move all your holdings to cash and wait it out. At my old stomping grounds at the mutual fund, I’d get calls from folks asking to exchange all their funds to Cash Management, the best money market fund we had. Actually, I’m here today to tell you why this is a bad move.

For a start, forget about the number of points the stock market dropped this week. Instead, view it as a percentage of the total market. When you look at it that way, you can see it as it really is: a correction. Face it, we were due. The market has been firing on all cylinders pretty much all year, and we rode up a ride from February, when we had that correction that sent everyone in a tizzy.

Think of all the folks that moved into cash, or panicked and sold then, instead of BUYING into the weakness of the market! Better still, look at the stocks that didn’t even flinch. You see what they missed? Look at stocks like AAPL, or GOOG. Barely a scratch. Good job if you’re in there. But lets say you’re on a stock that took a hit.

A correction isn’t an indication that you need to panic, and dump it. It’s an indication that on the average, folks think that stocks are overvalued. When the PIMCO guy came out on Thursday and said that he thought that bonds might go to 6%, he said he was bearish on stocks. Considering that guy’s been a bull for 25 years, he got the attention of a lot of people, and the sell off-which had abated somewhat-kicked right back in.

If you were smart, you didn’t move. Actually, if you were smart, you took advantage of the fire sale, and BOUGHT. Today, when the market made back almost all of yesterday’s losses, where would you be had you stayed put, or bought? If you bought, you’d be sitting pretty.

So you see how a correction is actually an opportunity?

“Yeah, but Wiz,” you say, “I’m in a mutual fund. I cant just trade off like that, because mutual funds don’t like frequent trading!”

You’re right. But, did you consider buying more shares of the fund? My old company allowed you to link your checking or savings account directly to you account, to purchase shares online. Im looking at my two funds, The New World Fund, and the Capital World Growth and Income Fund.

WGI-45.95 on 6/6 45.15 on 6/7, 45.59 on 6/8

NWF-54.61 on 6/6, 53.78 on 6/7, 54.06 on 6/8.

Look at WGI on 6/7 and 6/8. That’s 44 cents, after a drop of 80 cents the previous day. You gonna sell your holding because of a net loss of 36 cents?

But if you BOUGHT into the correction? I have 250 shares of WGI. Between 6/6 and 6/7, I lost 200.00. Let’s say I bought 200 dollars to get myself back to break even. That’s 4.430 shares at 45.15 a share. So now I have 254.430 shares. on 6/8, I would have a value of 11599.46, as opposed to 11397.50 had left it alone. I started the process with 11487.50 before the drop. I ended up making a total of about a 1.96 on the deal for that 200 I spent. Maybe not much, but considering I could have been down 90.00 had I done nothing…I’ll take 2 bucks up. Wouldn’t you?

And here’s the dirty little secret. You can do this every single month whether you own a mutual fund, or Coca Frigging Cola. It’s called dollar cost averaging. An overly simplified version of it is to just put the same amount in every month. Sometimes you’ll get a little less than you’re used to, sometimes a little more, if the market is down. Think of it like this: In Superman III (or OfficeSpace for the later set), they put in a program to shave off the fractions of cents left from every transaction. Ended up with a lot of money, didn’t they? When the market’s down, you get that extra fraction. You’ll see it make a big difference over time.

So don’t worry about corrections. Love them. They will happen, and if you just see them as corrections-tiny little redirects in the overall market-you can be strong, buy into it, and end up making a lot more money for yourself.