How Can You Profit from Market Downturns?

A Closer Look at Investing Through Market Volatility

Would it surprise you to learn that there are ways to profit from market downturns and market volatility? And would it surprise you that you might not need to do anything different to earn that profit?

Hopefully you are contributing as much as you possibly can to your 401(k). And hopefully, you are increasing the amount you are contributing each year. And hopefully, you have made a selection from the investment choices that gives you the best chance to maximize your returns over the long term given your tolerance for risk. If you are doing all of those things, contributing to your 401(k), here’s why you should be able to cheer for market downturns and occasional market volatility given enough time.

Here's the math… Consider these hypothetical examples of an investor adding $500 monthly to their 401(k) plan during two different time periods:

Time Period 1 – Flat Market

$500 saved per month buying shares at a price of $50 that didn’t go up or down for a year:
$500 / $50 = 10 shares bought each month… That’s 120 shares accumulated in 12 months
Year-end Value = 120 shares X $50 per share = $6,000
$6,000 invested with $6,000 value means 0% Return

[Note this does not factor in any matching contributions or any tax savings, which are both important benefits of saving through your 401(k)].

Time Period 2 – Volatile Market

$500 saved per month buying shares that started at $50, but the shares went down by 10%, then another 10% due to the volatile markets before rising back to $50 per share:

Monthly Breakdown:

• January – $500 / $50 = 10 shares purchased
• February – $500 / $50 = 10 shares purchased
• March – $500 / $45 = 11.1 shares purchased
• April – $500 / $45 = 11.1 shares purchased
• May – $500 / $45 = 11.1 shares purchased
• June – $500 / $40 = 12.5 shares purchased
• July – $500 / $40 = 12.5 shares purchased
• August – $500 / $45 = 11.1 shares purchased
• September – $500 / $45 = 11.1 shares purchased
• October – $500 / $45 = 11.1 shares purchased
• November – $500 / $50 = 10 shares purchased
• December – $500 / $50 = 10 shares purchased

The same $6,000 has been invested, but there were 131.6 shares purchased for the 12 months.
Year-end Value = 131.6 shares X $50 per share = $6,580
That’s a profit of approximately 9% during a time period when the share price started at one level, declined in value, then ended up just at the same level it started.

What’s the catch here?? (and there are several catches)…

This assumes that the share price goes down, then rises back to the level it was when it started which is not guaranteed. Two points though:

• For another angle on the math, in the hypothetical example above, the share price only needs to go back to $46 to break even on the amount invested.
• The other point is more about the record of the US stock market, which began back in the 1700’s but has strong historical records of market indexes since the 1920’s. Over the market’s history, there has never been a point where the indexes that represent the market have failed to return to their previous high point. Although past performance cannot be a guarantee of future results, the track record of ongoing increases has been well documented.*

So is this magic? Of course not! Is this a guarantee or a lock? Of course not! This all depends on your time frame, your ability to continue investing during declines in the market (when share prices have declined) and your ability to wait for rebounds following declines before cashing out.

We can’t predict the direction of the investment markets during any short-term time period. It is impossible to predict markets day to day, month to month or year to year. What we do know though, is that through the ups and downs over time, investing fixed dollar amounts on a monthly basis through these periods of volatility in your 401(k) is one of the least stressful ways to accumulate wealth over time.

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*https://themeasureofaplan.com/us-stock-market-returns-1870s-to-present/

Investment advice offered through OneDigital Investment Advisors LLC.

Systematic investing does not guarantee a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.
Market indexes are unmanaged and cannot be invested into directly and are not meant to depict an actual investment.
Past performance does not guarantee future results.
This is for informational and educational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. Please consult with a financial professional to review your specific circumstances.

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