In this video I will discuss whether to invest your money all at once or to dollar cost average over time. Now is the perfect time to have this conversation as there is a lot of uncertainty about what will happen next. The market is coming off an almost 40% decline in 2 months followed by an almost 40% increase in the same period. This level of uncertainty in the market and angst among investors elevates the age old question should invest all at once or over time. Invest now and fear another market decline and immediate loss? Or wait and watch the market continue to climb to new highs and fear the regret of missing out? These are not easy questions, so let me walk you through my thought process and how I view this.
Let me briefly explain what Dollar Cost Averaging (DCA) is, I will contrast that with just simply investing all at once. Let’s say you have $1 million to invest, you could either invest all $1 million at once, or invest it slowly over time. Typically, you take a % of the money and specific amounts of time to invest. For example, you might take 20% per month over a 5 month period essentially investing $200,000 per month and in 5 months all $1 million has been invested.
It’s fairly easy to understand that if the market DROPS over that 5 month period of time you will be better off by Dollar Cost Averaging in as you continue to buy at lower prices with each chunk of money you invest.
On the flip side if the market GOES UP over that same period of time you would have been better off just investing all of it at once.
Hindsight is always 20/20 but predicting where the markets or stock prices will go in the future is somewhat random and what we believe is almost an impossibility to predict. Given that information you could call it a flip of coin on which strategy will work out better in the short run. We believe it is best to base financial decisions not off the outcome (which is somewhat out of our control, i.e. pandemic) but rather on the decisions we make based on the information we have. We know that short term stock Randoms are very noisy and somewhat random AND that the stock market has roughly a 50/50 chance of going up vs. down in small periods of time. However when you add in the assumption of positive returns (otherwise why would we invest) we believe financially you will be better off by going all in, at any point in time.
Unfortunately, it’s NOT that simple. Just because something makes more sense financially doesn’t mean it’s the right thing to do. On the contrary I believe investors will have a better EMOTIONAL experience when it comes to investing by dollar cost averaging. The rationale is simple. We respond much differently to losing money (even if it is short lived) than we do to the regret of missed opportunity. Part of a successful investment plan is one that allows you to be disciplined which requires you to have a good experience.
The reason we spend so much time understanding our clients before they become our clients is because not every decision needs to be based on what’s best financially but rather on what makes the most sense for you.
If you’d like to have a more in-depth conversation, please click here to schedule a call.
