Investors have been whipsawed during late February and early March. Consider the performance of the Dow Jones Industrial Average from February 27th through March 11th of 2020. Investors saw:
- The three largest-one-day-losses in history – February 27th, March 9th and March 11th
- The three largest-one-day-point-gains in history – March 2nd, March 4th and March 10th
What are the chances that investors timed those six days perfectly? Pretty slim. Smart investors may instead implement a process called dollar-cost averaging, not market timing, to pursue long-term financial success.
Dollar-Cost Averaging
Dollar-cost averaging is not new and exciting.
The principal behind it is this: You put the same amount of money into the same investment on the same day each month. Those months when the investment’s price goes up, your set amount does not buy very many shares. But when the investment’s price dips, you get to buy more shares at a cheaper price.
Guess what? If the price goes back up, all those shares you bought cheaply make you some money. Those shares you bought when the price was high look good, too. There are a few reasons to consider investing this way.
Reason #1
It takes the guesswork out of trying to predict what the stock market is going to do. It’s easy to lose money seeking to time the market. As long as you feel good about the investment you buy, and you know that the fundamentals are right, you shouldn’t care what the stock market is doing day to day.
In fact, you can be confident when the market is down and you buy, because you get to buy more shares of an investment that you think has great long-term prospects. And you celebrate if the market rallies because all your shares are more highly valued. Also, you won’t have to put so much time and energy into investing. You can focus on your family rather than obsess over your portfolio.
Reason #2
It creates a disciplined approach to building wealth. You are now on a path to save and invest regularly, building wealth one month at a time. Yes, we have all read about those hot stocks that made someone rich overnight. But for most of us, it’s going to take a working lifetime to accumulate our wealth.
Reason #3
You can do this for as little as $100 per month. In fact some mutual fund companies set up a DCA for as low as $50 per month. You don’t need thousands of dollars to get started or to continue your dollar cost averaging plan. So, no excuses.
Some Things to Do
Start with a monthly amount that won’t break your bank. This is money you won’t miss on a monthly basis.
Do work up to a DCA approach into multiple sectors and industries. If you are doing a DCA into a mutual fund, you may have some diversification built in. But if you are buying an individual stock, you want to eventually own shares of various companies in different sectors and industries to diversify and reduce your dependence on one performer.
Commit to a DCA program of at least 12 months. It takes time to build wealth and see the results of your efforts.
Some Things to Not Do
Don’t wait for the price to go up or down. The key is consistency.
Don’t vary the amount based on how much is in your savings account that day, either. Set it up for the same day, same amount, same investment – good times and bad.
Don’t stop it when the market takes a nosedive. If you still believe in the investment, keep investing. Remember, in a down market you are buying more shares of your investment, at a lower price.
The DCA approach is about building wealth steadily, consistently and with discipline over time. It’s about creating and strengthening good money behavior.
Important Disclosures
This material was prepared for all advisor use.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
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