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Even Lousy Investing Beats Not Investing

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Worldwide Invest Better Day 9/25/2012

It wasn't that long ago that we suffered through a period of time in the stock market that has come to be known as "The Lost Decade." The 10-year period between the start of January 2000 and the end of December 2009 was one of the worst for stock market performance, ever.

Yet even during those dark times, one very straightforward strategy would have allowed you to just about break even -- or perhaps even make a few bucks along the way. All you would have had to do is dollar-cost average into the low-cost market-tracking SPDR S&P 500 (NYSE: SPY  ) ETF and reinvest the dividends you received. That's one of the simplest ways to invest, and that strategy -- or one essentially equivalent to it -- is very often available in 401(k)s and other retirement accounts.

Although those returns were lousy, both in absolute terms and when compared to the market's long-run average, there's one strategy that it certainly beat: not investing at all.

The act that matters most
When all is said and done, doing what it takes to invest in the first place matters at least as much as the actual returns you get on your invested cash. There are several reasons for this. Perhaps the most obvious is that if you never put any money away at all, no rate of compounding will get that goose egg to ever be anything but a goose egg.

But on another, more subtle level, the act of investing itself matters because making the commitment to do it well requires the rest of your financial house to be in order. You need to be in control of your debts and have enough cash coming in not only to pay your bills, but also to put some away for your future. In essence, investing takes discipline -- the exact same type of discipline that will help you manage whatever sized nest egg you do manage to amass over your investing career.

Your potential $1 million payout from "lousy" investing
A typical working career may last in the neighborhood of 45 years. Having and keeping a consistent investing plan throughout that journey may seem like a daunting task, especially if we suffer through many more of those "Lost Decades." Still, as the table below shows, the reward at the end of the 45-year process may well be over $1 million, even while earning consistently lousy 2% annualized returns:

Monthly Investment

-1% Annual Returns

0% Annual Returns

1% Annual Returns

2% Annual Returns

$0 $0 $0 $0 $0
$100 $43,499 $54,000 $68,162 $87,466
$200 $86,998 $108,000 $136,324 $174,931
$300 $130,497 $162,000 $204,487 $262,397
$400 $173,996 $216,000 $272,649 $349,863
$500 $217,495 $270,000 $340,811 $437,328
$750 $326,242 $405,000 $511,216 $655,993
$1,000 $434,990 $540,000 $681,622 $874,657
$1,250 $543,737 $675,000 $852,027 $1,093,321
$1,416 $615,945 $764,640 $965,177 $1,238,514

Source: Author's calculations.

Granted, to reach the bottom line of that table, you'd have to contribute the maximum allowable $17,000 to your 401(k) throughout your career. Still, the $1 million nest egg at the end is an incredibly impressive result for only managing 2% annualized returns. No matter how challenging it may seem to sock away more than $1,400 a month, note what happens on that top line. If you don't invest at all, when it comes time to retire, you won't have any nest egg to tide you through your not-so-golden years.

The joys of lousy investing
Once you realize how important making the commitment to invest is, getting past the fear of investing poorly is much easier. You can much more objectively look at every investment you have made as either a place to earn or a place to learn. For instance, I view my investment in industrial and financial titan General Electric (NYSE: GE  ) as one of the best investments I've ever made. It was a good investment because of what I've learned from it, in spite of the lousy returns I've received along the way.

Indeed, the principles I learned from that GE investment -- looking for a strong balance sheet and a well-covered and rising dividend -- have yielded far more successful investments than failures over the years. When coupled with the third key lesson from that investment -- prudent diversification -- the experience formed the foundation of an investing strategy that looks capable of withstanding the test of time. Not bad for an investment with objectively lousy returns.

Often, investing does work out
Of course, not all investments turn out poorly, and in fact some wind up doing quite well. Over the course of an entire career, the combination of lousy and great investments in the context of an overall solid strategy could very likely exceed that 2% annual return level. But if you're planning for lousy returns and wind up with better ones, you'll end at a much better place. Yet no matter what your ultimate returns, it's having the foundation and the dedication to invest that matters most.

General Electric is still a compelling stock. Get the full scoop in the Fool's premium report on GE. In it, our industrials analyst breaks down GE's multiple businesses to help you better understand the opportunities and threats to the company's portfolio. You'll also receive free updates for a year as major events affecting the company unfold. Click here to get your copy today.

At the time of publication, Fool contributor Chuck Saletta owned shares of General Electric. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended creating a bear put spread position in SPDR S&P 500 ETF. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (4) | Recommend This Article (25)

Comments from our Foolish Readers

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  • Report this Comment On September 18, 2012, at 5:23 PM, TMFDarwood11 wrote:

    Good article.

    Yes, Dollar Cost Averaging is a really good way to go. My spouse, once a "put your money in the mattress" investor is now a convert, and after a decade of DCA, is quite thrilled by the results.

    She invests regularly in 12 funds, which provides a good diversity.

    One of the subtleties of DCA is that it implies long term investing, Not long term as in "decades" which is something Warren Buffett suggests, but it is substantially longer than the "buy and dump" mentality.

    BTW, she too has some GE stock, but she resisted a broker's advice to "sell at $9" and buy something else. That "something else" has just about gained 50%. GE has done better, and pays dividends.

  • Report this Comment On September 21, 2012, at 1:02 PM, Lucaskasan wrote:

    Like most of those charts, they do not represent reality. Only recently has it been possible to put $17,000 per year in in 401(k). If the chart is representing dollar cost averaging, then the $17,000 possibility today (2012) may be (or not) the average from around 1990 to 2035 (the 45-year career posited by the article). The $1.2 mil is not likely to be enough to retire on. At 2% return, the rate of inflation will eat up that return and probably then some, so the spending power of the nest egg is less.

    Furthermore, this investing should be done only after debts are paid. It is ridiculous to invest money for a return less than the interest on debt. Once debt is paid, then money needs to go to an emergency fund. Then investing becomes a viable option. For most people, investing is not a viable option for at least some of that 45-year span.

    Studies also show that while the stock market may average 8% per year over long periods, individual investors average less than 2%, which means given the rate of inflation, they are actually losing real buying power even as the value of the account increases.

  • Report this Comment On September 22, 2012, at 12:03 PM, notraitor wrote:

    Yes, they told me dollar cost averaging was the way to go 15 or 20 years ago. And it is, but you must make 2 assumptions: you will live forever and not need the money immediately. This email is the first I saw about this strategy in a long time. The technique is hawked when everyone assumes prices are going up up up. And it works then. But if a market correction happens and you need the money then, you are out of luck.

    A person investing in bank CD's would have made out better than someone investing in the broad market in the lost decade. We still have not surpassed the all time record S&P record. We may if the fed keeps buying T bonds (also called Quantitative Easing or Devaluing the Dollar or to put it bluntly printing money to avoid home price deflation). In the end a 2% return over 10 years where the price of food and fuel quadrupled is truly dismal.

    The most useful advice I get from the MF is targeted investing advice, that is where you can beat the markets.

    You did a pretty good job sugarcoating the lost decade. Thanks.

  • Report this Comment On September 22, 2012, at 7:14 PM, niknik57 wrote:

    I agree that 401k dollar cost averaging is a lot better than doing nothing. I have done much better by

    investing in high quality growth companies and holding them long term. In this lost decade my 10 yr average beat the S&P by several percentage points. The point is there are quite a few companies in the S&P that are dogs. If you eliminated all the low quality companies, the S&P's 10 yr return would of improved dramatically

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