I have been stock market trading for over 30 years; I opened my first stock market trading account on the next business day after I turned 18 years old. I have made many observations about the market in general but one of them that to me is as important as any of them and may actually be one of the most important is the real impact of a flat market on our ability to increase our wealth over a long period of time. The reason that this came up for me is because this past month is a perfect example of what a flat month can do to an investment portfolio.
The S&P 500 closed on October 31, 2012 at 1412.16, it closed one month later on November 30, 2012 at 1416.18. Throughout the month the index created nearly a perfect V shape with a swing low occurring on 11/16. If you had taken a long position at the beginning of November and held it for the entire month or if you took a short position at that same time and held for the entire month either way you were about even. The only real way to have increased your wealth during this time was either to have sold at the beginning of the month and closed the short position in the middle of the month or to have bought in the middle of the month and rode the right half of the V back up. Either way this would have been allot to ask for from the average investor though some may have achieved it.
Investors that are dollar cost averaging into some type of a longer term investment did not receive any benefit from the market in November either because the shares they purchased at the beginning of the month would be worth about the same at the end of the month and the new shares that they purchased at the beginning of December would still have about the same value. If you were a long term buy and hold investor the impact of last month does not look that significant because it was a break even month but there is definitely a cost to a prolonged flat investing period.
The reason that a flat month like we had in November is devastating is because it robbed us of time. Time is not a renewable resource, once it is spent it is impossible to regain. Having a flat portfolio for a month does not sound that devastating but how many months does that actually happen and more importantly how many years does that happen. Each month and each year we hope we get closer and closer to our financial goals, whatever they may be, but a flat return in our portfolio over an extended period of time not only robs us of wealth building time it may move the realization of the financial goals that we have out further and further into the future.
If you are investing for retirement, which may be a long term investment, and you will have to rely largely or solely on income from your investment dollars for survival during your retirement years if you have a flat time period during your saving and investing life it could actually move your retirement out at least a year and it could impact your standard of living during retirement. Adding up all of the months and years of flat returns and negative returns and you will see that retirement may get pushed out further and further into the future. This may not sound like that big of a thing right now but what happens when you review your portfolio a few years before you were hoping to retire and you realize that it will be impossible to meet your retirement goal on your projected retirement date? How far out into the future are you willing to push your retirement and other financial goals due to a lack of solid investment returns and keeping lazy dollars on hand that are either non-performing or underperforming?