Investors, Don't Weep for the Peaks

Is the market even down? To a buy-and-hold investor, definitely. But someone who averaged down has a much different, and more positive, perspective.

As of Friday's close at 1241, the S&P 500 was down 20% from its all-time peak in March 2000 at 1552. The Nasdaq 100 index (the 100 large-cap stocks trading on the Nasdaq selected by the Nasdaq to be in the Nasdaq 100 index), at its Friday close of 1607, has fared even worse, down 66% from its peak of 4816. As we are reminded constantly by the media, this has had a devastating effect on national wealth, which is only barely supported by the large uptick in housing prices.

However, I don't really buy into that idea. In fact, the average investor is better off now than he was in 2000, even if he plowed all of his savings each month into the market.

Let's say an investor started investing right at the peak, in February 2000. Let's say that each month this average investor took $1,000 out of his paycheck, prudent savings, and put that entire monthly addition to his nest egg into stocks. How would he have fared?

On the S&P 500, assuming he used Spyders (SPY - commentary - Cramer's Take) as his investment vehicle, 68 months later he would be up $8,712 after making 68 deposits into his SPY-driven nest egg. Not a huge home run, but certainly better than being down 20%.

Admittedly, our investor would have had a rough roller-coaster ride, as the chart below shows. The red area represents the period during which his investment was underwater; the green area represents when it was above water. The blue line represents the performance of the S&P 500 since 1993.

Rough Ride But the investment represented here would have come out fine

Click here for larger image.

Source: Wealth-Lab, James Altucher

Since the fourth quarter of 2004, our prudent saver has been in the money.

What about the Nasdaq 100 Unit Trust (QQQQ - commentary - Cramer's Take), which has fallen 65% since its peak? Putting your monthly savings of $1,000 into the QQQQs since February 2000 would have resulted in a profit of $5,054.

Again, not a bonanza, but much better than the underlying index, and it's only since early 2005 that our saver has been solidly back in the green:

Same Result, Different Index A similar investment in the QQQQs would have yielded another small, but definite, gain

Click here for larger image.

Source: Wealth-Lab, James Altucher

So even when stocks are a horrible investment, as they clearly were in early 2000, a strategy of prudently dollar-cost averaging down when everyone is panicking and trying not to time the market too much pays off over time. You can see that it has in the past; I expect it will continue to do so.

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James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. At the time of publication, neither Altucher nor his fund had a position in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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