Did you know that it took the stock market 25 years to recover from the Great Depression? Or that the stock market (as measured by the Dow) made virtually no progress from its pre-Bear peak in 2000 until mid-2006? Pretty scary stuff, especially when you consider that the Dow just experienced its third consecutive triple digit loss, dragging it down to a five year low.

As bad as this all sounds, its important to keep in mind that the situation would be considerably better if you continued investing throughout the down periods. Indeed, by sticking to your guns and investing in a down market, your new money (invested during the downturn) will turn a profit by the time your old money makes it back to even. All you need is nerves of steel

Investing through a down market

Dont believe me? Check this out Assume that you invested $10,000 in a mutual fund that cost $100/share. Further assume that you had horrible timing, and the market went south the very next day, resulting in a 50% decrease in share price over the next 18 months. Fortunately, things eventually started looking better, and your investment rebounded to $100/share over the following 18 months.

How would you have performed? Well If you had:

• sat tight, then youd be back to even money
• panicked and sold, youd have locked in at least part of your loss
• bought through the downturn, youd be ahead of the game

Just to make things a bit more concrete, lets assume that the price dropped linearly to $50/share during the first 18 months, and then recovered linearly to $100/share over the next 18 months. Lets further assume that you invested another $10k after one and two years. In other words, your timing wasnt great, and you ended up buying in about 6 months before the bottom (on the way down), and again six months after the bottom (on the way back up).

How would things look after three years, when the market is finally back to even?

Running the numbers

Heres a quick look at the numbers:

Original investment: $10,000 @ $100/share = 100 shares

Year one investment: $10,000 @ $66.50/share = 150.375 shares

Year two investment: $10,000 @ $66.50/share = 150.375 shares

Now, in year three, youre sitting with 400.75 shares at $100/share. Guess what? Thats a total value of $40,075 even though the market has been flat overall, and you only invested $30,000. Calculating your internal rate of return over that three year period works out to an average annual return of 15.10% .

While the numbers above are somewhat contrived, and the specifics will vary with things like how far the market falls, how much you invest during the downturn, and how quickly it recovers, the larger point still stands. Regular, consistent investing pays dividends over the long run, even in the face of market turmoil.