…or less! Yes, you too can buy shares near the low point!
I have a cast-iron, failsafe, 100% guaranteed way of ensuring you can buy within 16 days from the exact bottom of this brutal market.
You don't need to be Warren Buffett, George Soros, Jim Slater or even David Kuo to achieve this feat. Anybody can do it, even me. In fact, during of tech crash of 2000-2003 -- when shares in general slumped 50% -- I bought about a week before the market rebounded and started a glorious four-year bull run.
So… what's my secret? I make monthly contributions to a low-cost index tracker.
The Motley Fool has long advocated that, for most people, making regular payments to a cheap index fund is their best way of harnessing stock-market returns. You get two main benefits. First, the market's ups and downs can be smoothed through your 'pound-cost averaging'. Second, you avoid the stress of trying to time a lump-sum investment.
Here's how it works in practice. Let's say we started putting £100 a month into a tracker at the worst possible time -- the end of 1999, when the FTSE 100 hit its all-time peak of 6,930. By March 2003, the tech crash would have reduced our aggregate £4,000 payment to £2,901 assuming dividends were reinvested and a 0.5% initial charge. Not a great result.
However, by June 2007, the story had changed dramatically. The FTSE 100 had rallied more than 80% from its March 2003 low to 6,606 and our imaginary tracker would now be showing a decent gain. Some 91 monthly payments, totalling £9,055 after that 0.5% initial charge, would have been worth £13,310 just before the credit crunch erupted.
It's important to note that £4,000-plus profit was achieved without the FTSE 100 regaining its 1999 peak. Toughing it out with those regular contributions during the down years of 2001 and 2002 -- and not getting frightened off by all the doom mongers -- was critical to ensuring full advantage was taken during the 2003-07 bull market.
Fast forward to now and our imaginary tracker is back to showing a loss. With the FTSE 100 at 3,712, our pot is worth £9,423 after 111 month-end contributions of £100 and reinvested dividends. Although the FTSE 100 is 47% below its all time high, I calculate the index has to rise just 17% to 4,343 to get our tracker back to breakeven. Clearly staying the course during the down years and reinvesting those dividends mitigated the market's sharp falls.
In time, I'm sure all faithful tracker investors (me included) will be showing a solid profit on their regular contributions, just as they were during June 2007. What's more, the FTSE won't need to reach a fresh high to achieve it. And by keeping the contributions going, tracker investors will once again be able to boast they bought within sixteen days of the bottom. You never know, that particular contribution may have already been made!
Maynard writes Champion Shares, the Fool's share-tipping service. He publishes at least one recommendation (or re-recommendation) a month, so the Champion Shares scorecard will also 'buy' within sixteen days of the bottom. A free trial of Champion Shares is available for 30 days. There is no obligation to pay. Maynard contributes regularly to a FTSE 100 tracker and a FTSE All-Share tracker, and owns some iShares FTSE 100, an exchange-traded fund that tracks the FTSE 100 index.
