y = monthly deposit to index fund
z = 1 - % by which market has declined. (For example, if the previous balance was $100, and the market was down by 2%, z would equal 0.98.)
I mentioned a couple of weeks ago that Ed and I were trying to figure out what to do about our 401(k).
What we're told to do, and what we did do during the 17-month bear market of 2007-2009, is nothing.
That's John Bogle: "Don't do something. Just stand there."
That's what we did.
We stood there for the entire 17 months.
Worse than that: we continued to contribute money.
Ed finally took a close look at his Vanguard statement last week. Seven years later. He found that for the first several months of the bear market, his balance stayed the same.
Which meant that every penny he and NYU were putting into the fund, month after month after month, was instantly burned up in the market. Every penny. Not one survived.
Then at some point, presumably in October 2008, the account balances started going down. Which meant that not only was every new penny being burned up, but now the old pennies were being disappeared as well.
17 months of this.
We're not doing that again.
A paper loss is a real lossThe money we lost didn't come back.
New money came in.
That may sound like a distinction without a difference, but it's not.
The reason the market made such huge gains after 2011 was that the Fed did quantitative easing. If the Fed hadn't done quantitative easing, there was no reason for stocks to go back up. The Bank of Japan didn't do quantitative easing when they hit zero, and Japan's stock market declined for two decades, losing 3/4 of its value in that time.
This is America, and the Fed did do quantitative easing, so all things equal I assume they'll do it again if need be.
But I don't assume they'll do it before the market loses more than it has already. The Fed obviously wants, desperately, to tighten money, and tight money is bad for markets.
If, at some point during those 17 months, Ed and I had redirected his monthly deposits to a money market, we would be far ahead of where we are now.
We couldn't have timed the move exactly, of course. We would have sustained losses for a few months going into the bear market, and we would have missed the return of the bull market for a couple of months on the other side.
Doesn't matter. We'd still be far ahead because when we got back in we'd have had lots more to invest than we did when we got out. We've have had all the money we'd protected by putting it in a money market instead of the stock market.
The trend is your friendThe reason people like us are told to put our money in index funds and forget about it is that people like us can't time the market.
(I used to think no one could time the market, but a friend of mine, whose money is managed by Neuberger Berman, tells me she's been earning 1% above market returns, after fees, for years.)
It's true that I can't time the market.
But there's no trick to timing a market that goes down 17 months and loses 56% of its value. That's not a blip. It's a trend.
My new rule: if the trend is up, we're in the market. If the trend is down, we're not in the market. If the market is moving "sideways," which is more or less what it's doing now, we're also not in the market, but we're paying attention so as not to miss too much of the bull market when the bull market returns.
My Fed watching hobby helps with all this, needless to say.
Because the Fed is a monetary superpower.