You’ve probably heard the investment advice, “Buy low, sell high.” It would be nice if it were that easy, but no one can accurately predict when the market, let alone an individual security, will be at its high or low, making this advice extremely difficult to follow. Instead, many experts recommend staying fully invested, even during market downturns, to increase your chances of investment success. Historically, investors who stay fully invested fare better than their market-timing counterparts, because timing the market is nearly impossible. When an investor pulls assets out of the market in an effort to avoid losses, they will likely also miss some of the higher returning days. By remaining fully invested, you never miss the best performing days.
Many investors who stay invested use the systematic investing method to help achieve dollar cost averaging and meet long-term investment goals. Systematic investing is simply investing a specific amount on a regular basis, such as contributing a certain percentage of your pay to your 401k from each paycheck. When you invest systematically, you add to your investments regardless of market conditions. This is how you achieve dollar cost averaging (“DCA”). When prices are low, you will be able to purchase more shares for your money, and conversely, less shares when the price is higher. Rather than sitting in cash waiting for ideal market conditions, where your money is not working you, invest a set amount automatically and you will end up with an average price over time. If you establish an investment plan involving systematic monthly or semi-monthly investments, it is easier to stay the course when the market goes through rocky periods than it is when you invest without a plan. This helps you to stay committed to your long-term goals and takes the emotion out of investment decisions. The main reason to use DCA is that it reduces the timing risk of investing a large amount of cash at the wrong time.
DCA doesn’t always have to be used in combination with systematic investing. DWM typically employs DCA when a large infusion of cash comes in from a client. Rather than put it all into the market immediately, we may implement the money by investing equal portions over a few month’s time. I.e. 1/3 immediately, 1/3 a month later, and a 1/3 two months later. To limit transaction costs we don’t do this with smaller amounts. We also don’t typically use DCA when we receive a non-cash transfer, i.e. $400,000 worth of securities from an old broker. In this case, the money already has exposure to the market so there’s no reason to DCA back in.
Systematic and DCA investing are smart ways of putting cash to work and putting you on a disciplined, emotion-less investment schedule. If you’d like more information, we’re happy to help!