As the Dow reaches and continues to set new all-time highs, many investors are wondering if they are following the conventional wisdom of "Buy low, sell high." Dollar cost averaging can help take some guesswork out of investing.
As the Dow reaches and continues to set new all-time highs, many investors are wondering if they are following the conventional wisdom of “Buy low, sell high.” In conjunction with my previous article about not trying to outsmart the market, I would also suggest that consistently investing cash flow in what is called “dollar cost averaging” is also a helpful mathematical way to help take some of the guesswork out of investing.
Dollar cost averaging is the idea that you don’t buy the same amount of shares in a given month when buying equities, but investing the same amount of dollars on a schedule of set intervals. So if the market is high, you are still investing, but simply buying fewer shares. But if the market dips down in a given month, you are buying more shares with that same amount of investible dollars. Over time, this is can lower the average share price purchased and takes the guess work out of market timing when investing for the long term.
This strategy does not assure a profit and does not protect against loss in declining markets. Also, since such a program involves regular investment purchases regardless of fluctuating price levels of the investment, consider your financial ability to continue purchases through periods of low price levels.
A common criticism of this technique revolves around the timing of investing an existing lump sum of cash. The criticism lies in past experience in the long-term market and its general trend of continued upwards growth.
A recent study by Vanguard reported some hard data that when dollars are suitable for investing for the long term they should be in the market. This goes along with a point in my last article on the contrarian view that there is risk of loss of purchasing power due to being OUT of the market in the long term versus the balancing of purchase power risk versus investment risk associated with being IN the market.
Besides the math, dollar cost averaging also helps take the emotional aspect of investing out of play as well, which for the vast majority of us is a good thing.
So, in conclusion, consistently investing the same amount of NEW cash flow every month in a retirement or brokerage account can be a very nice tool to potentially enhance overall investment returns in the long run, but if you have a lump sum that will be needed for a long period of time, you may indeed be better to place it all in the market and avoid the risk of not being in the market.
Investments will fluctuate and when redeemed may be worth more or less than when originally invested.
Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., Members FINRA/SIPC.
CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource group is not affiliated with Securian Financial Services, Inc. but is independently owned and operated. The answers provided are general in nature and are not intended to be specific recommendations. Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax, specific loan repayment for an individual or legal advice. 665489/ DOFU5-2013