Imagine you have a large cash lump sum and decide to start your investment strategy on January 1, 2008. You plough it all into a low cost index fund - for simplicity we will look at only the Australian stock market.
At the end of 2008 you would have $419,000 left, reinvesting dividends. If you do absolutely nothing, today you would have about $786,000.
But let's say you are a bit nervous about this whole credit crunch scenario in 2008 and decide to invest in an ultra safe money market fund paying a 3% yield, and on January 1 2009 you decide to plough everything into the stock market and leave it there. At the end of 2008 you would have $719,000 and today you would have $1,360,000.
Avoiding big drawdowns in really, really important.
