We have already told you that: a) we think the market will recover, and b) that the market is down right now is probably a good thing for you, over the long term.

Yet, the media is buzzing with talk of global recession. And do not even get the economist talking…

Of course, as some wag once said, economist have accurately predicted 10 of the last four recessions. After a while, if you repeat something long enough, it becomes true just because enough people believe it and act upon it.

This morning I came across this article from the Wall Street Journal that shows a number of reasons why the economy is actually doing quite well and is nothing you should really be worried about.

I encourage you to read the article for yourself, but here are a few quotes from it that stood out to me:

It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble.

It is most likely that this recent weakness is a payback for previous strength.

A year ago, most economic data looked much worse than they do today. . . . But the economy came back and roared in the middle of the year.

Because all debt rests on a foundation of real economic activity, and the real economy is still resilient, the current red alert about a crashing house of cards looks like another false alarm.

What do you think? Is the news of recession just so much scare reporting, or does the story have teeth?

As Aleks already pointed out, the last few days have been a bumpy ride. However, smart investors are not scared. Not at all.

The main thing that keeps people from investing in stocks is the volatility. This year your account is up 12%, next year it is down 3%. Unless you are different from every other person I have ever met, realizing your portfolio is down 3% for the year (that you have less money in your account on December 31st than you did on January 1st) is going to bother you… but it shouldn’t.

If you were planning on moving to a new city next year, would you want the cost of housing in that city to go up or down over the next year?

Down, of course. No one wants to spend more than they have to, and we are confident that, over time, the average selling price of house will rise, so it makes sense to get the lowest price possible for the house you are going to buy, right? Right.

However, most investors are upset when the market goes down, despite the fact that they have 25 years or more until retirement and thus are not finished buying stocks yet. Perhaps this is best illustrated by a quick story. I first heard this one from the great broker Nick Murray and it completely changed the way I buy stocks.

The Tuna Fish Story

I like Tuna Fish. A Lot. In fact, I have always liked tuna fish and know that I always will, so I look for sales on tuna fish so I can stock up when the price is low.

Now, in my part of the country, a can of tuna costs about $.75 a can, on average. This morning I open the paper and see that Food Lion has a sale: $.25 a can. Happy Day! I take the truck to Food Lion and buy as many cans as they will let me, because I am buying three cans for what I normally pay for just one can. While I am out, I stop by Kroger and notice that their Tuna is $.80 a can, so I say “no thanks” and keep on going.

You see, I am not through buying tuna fish. I am going to eat tuna fish until the day I die, so it makes sense for me to buy it whenever I can, provided it is a good deal. Being of Scottish ancestry, I pray regularly for good deals.

If the market has a large correction, it is not a disaster. It is not a cause for panic. It is not the end of the world. It is simply a big sale. They happen on average every seven years or so and buying heavily when they happen can give you wealth beyond the dreams of avarice.

Well, It’s Thursday, January 24, 2008, and unless you have been living under a rock, you have to know that the markets have taken a huge hit over the past few days/weeks. The numbers have reached such levels that most of the experts have agreed we are past a “correction” and approaching a full blown recession.

To clarify these terms a bit, a recession is defined as the economy has had two consecutive quarters of negative growth (as determined by a decreasing gross domestic product. A Correction is when you have a decline of 10% in a stock or in this case, the overall market. A correction is viewed as normal; the market is cyclical. When that figure reaches 20% some say we are past a correction and into a recession, which can lead to a depression.

Luckily, it seems like we may avoid that. There has been an emergency reduction of the prime rate by .75 points. It was the largest cut in the federal funds rate since 1982. This will help to help combat the market’s drop. The drop seems to have slowed the trend and may help to reverse it.

What does this all mean to the average investor? It means that the value of your portfolio has very likely dropped, but the lion’s share of the drop is done. This is not the time to decide that the market is too risky. Actually the exact opposite is true. The losses we have seen have already taken their toll, and now the time is ripe to buy. If you take the opposite stance; what are you really doing? You are selling low, with plans to buy high. Not the best plan for your future worth.

My thoughts are to hold on and continue to add to my portfolio. These are the lowest prices we are probably going to see for a while, so why not buy low and continue to hold?

Virtually every investor that ever lived wishes he could have bought more stocks then he did when the market was down and less than he did when the market was up. After all, the name of the game is to buy low and sell high, right?

Wouldn’t it be nice if there really was a way to time the market, so you invested heavily when prices were low and cut way back when prices are high? Right now you are probably thinking something along the lines of “Dream on”, but I am here to tell you that there is such a technique and, properly applied, works every single time. If the market is low, you load up; if the market is high, you don’t. Using this system will simplify your investing, remove stress from your life, increase your long term rate of return and remove wrinkles (I made that last one up). What is this magic formula?

Dollar Cost Averaging, and it is both incredibly powerful and incredibly simple. Simply put, you systematically invest the same dollar amount on a routine basis (such as monthly), regardless of what the market is doing. This will cause you to automatically buy fewer shares when the price of the stock is high and to buy more shares when the price is low.

Let’s use an example:

You have researched XYZ company and think it makes sense to invest in it. Lets say the stock of XYZ sells for $10 a share as of today and lets also say we have $100 a month to invest. In the first month, your $100 buys 10 shares; no surprises here. In the next month, the price of XYZ drops to $7.50 a share, but it does not bother you a bit - in fact, you were hoping it would. Your $100 now buys you 13 shares. The next month rolls around and you see the price of XYZ is up to $8.00 a share, which means your $100 will buy 12 shares. Then, the expected uptick happens: The fourth month you are investing, the stock of XYZ soars to $12.50 a share and so you only buy 8 shares.

Lets stop here and look at what we have so far. We have invested $400 and bought 43 shares of stock in XYZ, with a current account value (ignoring fees or commissions) of $537. On the other hand, if we had invested the entire $400 at one time, we would have 40 shares of stock and a current account value of $500. By dollar cost averaging, we managed to increase our rate of return by 7% and we did not spend one extra dime to do it.

If you decide to dollar cost average (and I hope you do) you will be unique among your friends by actually hoping the market goes down, so you can buy more.

The biggest reason I am nuts about equities is, quite simply, their long term return potential. While rates vary dependent upon a wide range of factors, the average debt instrument out there (such as a bond, for example) is going to pay you somewhere in the range of 4-7% annually in the current marketplace. The long term rate of return of equity instruments (such as stocks), on the other hand, is somewhere around 10-12% annually.

Note the key phrase in the above paragraph is ‘long term’. By long term, I mean at least 10 years. Yes, I know that in any given year, the stock market may do better than the 12% I mentioned above, but, as Damon Runyon, the great sports writer once said, “that is not the way to bet”. If you are going to be investing for the long term (and you should be), why not go after the best long term rate of return?

By using the rule of 72, we can see that the difference to us over time:

Money that receives an average rate of return of 6% (like you can expect from bonds, for example) a year will double every 12 years. However, money invested at an average rate of 12% (like the average rate of return from a stock account) will double every 6 years. In other words, in the example above, if you start with $10,000 dollars, by the end of 12 years you will have $20,000 in your bond account or $40,000 in the stock account. Exactly twice as much money.

Which would you rather have?