Long term Investing during down markets

People are always looking for ways to make money. In a uptrend market no one wants to miss a boat and in a downturn is always about how can I recover the lost dollar.

Investing during down times could be hard especially around the pessimism that may surround the news. It's been said that more or most returns could be fetched by investing in a downturn.

Although past is not an indicative of the future lets take a look at examples of investing in some bear markets in the past and how investing during bear markets can have profits of its own.

The rule is start systematic investments(SIP) for every specific period in a bear period until the next positive trend or until the value at last instance is lesser than the current one.

Let us start with the oil crisis in 1973 which started around October 1973 which further led the downfall to the stock market. Assumption is that one started investing in the NASDAQ index back in June 1973 in a systematic investment plan until say September of 1974 . Between this period the NASDAQ went from 108.54 to around 59 with SIP of $100/month. For a period of 15 months this would mean an investment of $1500 with an average price of $84 for the index with roughly 17,85 shares.
courtesy:finance.yahoo.com

Lets consider the same investment plan for investments into savings account at the same timeframe with an average of an savings interest rate from 10% to 6% (source http://en.wikipedia.org/wiki/Image:Federal_Funds_Rate_%28effective%29.png ). This is effectively money wit 8% rate of return for a principal of $1500.

Lets first have an investment period of 5 years by which the NASDAQ index went up to around 130 which (not inflation adjusted) is an increase of roughly 54%. This money will now be taxed
Our initial investment now in the share market is worth around $2321 (which after tax will be $2115) whereas our money in the bank would have grown to around $2007 with the assumption that the tax bracket is 25% and the money is kept in an after tax account. The net (compounded interest) gain here is 33%.


This is money I consider good for a long term investment (5- 10 years) vs. a very long term (more than 10 years) investment.

Applying the same hypothesis to other bear markets in the past from 2001 - 2003 and the 1979 energy crisis yielded promising results. A larger bear market meant more time to stay put into the SIP but saw good yields thereafter.

There are some assumptions made in this theory: Investor is starting to invest in the fund at this point or does not already have an SIP in the same fund from an earlier time.

In my second article I will try to analyze if buying during a bull market is lucrative. Stay tuned and let me know your thoughts.

The bear market investing for longer term looks to be lucrative.

Personal Inflation - whats yours?

According to the wikipedia the definition of Inflation is "a rise in the general level of prices over time. It may also refer to a rise in the prices of a specific set of goods or services. In either case, it is measured as the percentage rate of change of a price index."

Inflation (to a certain degree) in general is useful for the economy as it forces spending and re-investing in the hope that prices will increase in the near future and helps one to lock down a price.


Inflation is one buzzword that one may be hearing a lot these days. The CPI (Consumer Price Index) or COLI (cost of living index) are some of the measures of inflation. COLI gives an estimated comparison between two regions and is useful when moving jobs or to different cities. Attached link provides one such comparison. Another example is CNNMoney's site.

How would you compare the inflation affecting you? One quick measure is comparing the grocery and other bills you paid vs. the one paid this year. Well, it really depends, can compare how much house prices and other things went up as well.
In general a rule of thumb would be to compare how much things that you require everyday went up. That would give you a sense of the net affect to you. Then there are indices - virtual which went up by a certain amount only if you counted them. One such example is housing cost. If you are not shifting to another house then the house price increases or decreases will not affect you directly.

I found such personal inflation calculators online as well. Taking into account one's personalized inflation one needs to observe that re-investing or salary increases are growing at atleast the same or better rate otherwise you are making a loss. vs a visual profit.

The main factor in inflation at least in the US is gasoline. So much depends on it. Often you will find just a single person driving a car unless of course one is making use of the HOV lanes. Public transport being such a scarcity people are forced using their automobiles. The real question is when will people seriously consider using the public transport more seriously and make their local cities think greener !

Bank of America - keep the change or eliminate the coins?

Over the last few years Bank of America has been publicizing its keep the change program . Essentially Bank of America rounds of what you pay to the nearest dollar. Thus if you buy a burger for $3.49 , Bank of America will round it to the next logical figure of $4. Bank of America will match the keep the change for the first three months and then match proportions for the same. Interesting program!
What amount do consumers pay tax on ? $3.49 or $4.0. Bank of America might make some
I had heard of a similar thing used in the movie "Office Space" where the IT Geeks rounded off every transaction to the nearest dollar amount and won themselves a fortune.
Whats so great about this? My guess is that this is meant for lazy people who do not transfer from Checking to Savings account immediately and loose the interest OR its good for people who do cash transactions and loose cash all the time.
According to the article about 25 million people do not have bank accounts .
In relation to my earlier post about coins been eliminated - could the above be one way of starting it OR do we not need it once we get rid of those pennies or nickels ?

Small denominations - should they be eliminated?

CBS 60 minutes last week talked about "Should we make cents". Here are some of the takeaways summarized

1. It takes approximately $134 million in cost to make $80 worth of pennies.
2. Pennies are made up of approximately 98% zinc the cost of which is spiraling over the last few years.
3. Its illegal to use these coins and resell them for the metal.
4. Kids used to collecting pennies or nickels will now have to search for something of greater value to start putting in their piggy bank.
5. Rounding off will cost Americans approximately $600 million a year.
6. Americans waste approximately 2.4 hrs a year counting pennies ! Is it a lot?

Some thoughts on the same:
Most of the things in US have a price tag of .99 , 9.99 or 99.99 are common examples. Will they get rounded off to the next digit ? If these are taxed items the taxes of these could be adjusted to rounded off to the next divisible by dime or 10 value !
This will be a one time inflationary hit that will be felt.
Some people have pointed out the 9/10 value thats commonly seen as gas stations. How do we account for that?

Most of the money is nowadays paid on credit or electronic media. So, that gives a lot of freedom on not producing pennies !

What do we do with our existing pennies or nickels if they are stopped ? Bring it to n exchange center where you get back the equivalent back and the change in electronic form?

OR last but not the least - make paper money for these small denominations?

taxable vs. tax advantaged accounts

I've been always thinking which one should one choose if they have money after tax with them.
Should one invest in Mutual Funds/stocks in IRA (Traditional for this calculation) or in a taxed account?

Assumptions to max some sense:

Traditional IRA contributions are after tax money contributions
Principal : $4000
Gain per year : 10%
No further investments
Tax bracket : 25%

Age: Atleast 20 years away from retirement

With a 25% tax bracket and no annual increase in contributions this value will grow to $8244 in a taxable account or $10375 in an IRA account. If one withdraws from an IRA prematurely with a 10% penalty the value of the IRA will be lesser than the taxable account at this stage.Assuming a linear increase in the yearly rate of return the average is $671.5 /year = $6715 for 10 years.

10% penalty on $6715 = $671.5

10 year analysis
Total value of IRA on early withdrawal
10375 minus 671.5 minus 1678.5 = $ 8025
Total value of the taxable account = $8244

An analysis after 20 years reveals that the taxable account is still better if one wants to withdraw money. Will you need the money until retirement is the question ?
If not then traditional IRA is certainly a good investment.

One can use the tax calculator here

Thoughts?

Social security tax limit

SocialSecurity.gov has this information about social security tax limits.
The limits for social security go up every year. For employeed individuals it is 6.2% on earnings up to $97,500 for 2007 and will go up to 6.2% on earnings up to $102,000.

According to the Wiki in the US "Once that amount is earned for a given year, neither the employee nor the employer owe any additional social security tax for that year."

Please refer to IRS publication 15 for details.

More searches on this yielded the fact that individuals might see " Social security limit reached" in their paycheck.

Sharebuilder from IngDirect

Share builder from ING direct is the new thing. This promises $4 for stocks with automatic investment plan !
Comes in three flavours: Basic , Standard and Advantage.
I will look into this more and come back with details !

I found that someone has already done an analysis. You can find it here:
http://www.mymoneyblog.com/archives/2007/12/better-way-to-invest-with-ing-direct-sharebuilder.html