Updated: Aug 29, 2019
Thinking about getting into the market but nervous that we are due for a pull back or crash? Let me say it to you plainly…we are. Here is the thing, nobody knows when. Because of that, it’s never going to be the right time to invest. You probably hear it in the media all the time. The crash is coming! The economy is overheated! One thing is for sure, the media wants to make money and the more you click and read the more they make. The more you consume the better they fare. Here is a secret...they don’t know. Shhhh!
I can remember articles being written in 2012 saying that the coming recession is looming, the market is on the verge of a bear market. If you would have listened to these articles in 2012, then you would have missed the biggest and longest bull market in stock market history. Yes, the market is reaching all time highs and yes there will be a pull back. But when? That is the $64,000 question. The market can climb another 2000 points higher, or 3000, or 4000, or 10000 before a pull back. Or it could begin a pull back tomorrow. The fact is we don’t know, and that info shouldn’t hold us out of the market.
I know what you’re thinking, “With my luck I’ll buy at the top and we’ll go into another 2008 recession.” While that is a possibility, since we don’t know when the pullback will begin, trying to time the market is a fool’s errand. I know people who are waiting to get back into the market after selling in 2008. They are on the sidelines as the market has soared to new highs year after year. I get it though; the fear is relevant. Nobody wants to be the person who buys at the top and loses.
What Should We Do?
The old adage says, “Don’t put all your eggs in one basket”. In terms of when to invest think of it as “Don’t put all your money in at one time”. You see, you could invest at the very top like in 2007 and must climb out of a hole to get back to even. That’s no fun. Nobody wants to see their portfolio take a big dive. Or you could get lucky and place all your money in the market in 2009 and be sitting pretty. Here is the best of both worlds: Dollar Cost Averaging (DCA).
With dollar cost averaging you are investing a defined set of money in the market consistently over time. Think of a 401(k), each month you put in 2%, 3%, 10%, etc into your 401K. The deferral doesn’t care if the market it hot or the market is cool as ice the money goes in.
Investing using dollar cost averaging does two things.
1) DCA helps keep consistent investments going in the market so you don’t have to think about it. Once it’s set up it just happens. You’ll be there for the good days. Missing just the 10 best days can really hurt your overall returns as shown in this Motley Fool article. DCA helps make sure that you are investing consistently over time so you can ensure you are not missing out on the gains.
2) DCA helps ensure that you aren’t only investing at the very top of the market and helps invest near the bottom when it’s the toughest to put money in psychologically.
It can be tough to pull the trigger but be diligent and like an old Ronco infomercial use dollar cost averaging to “Set it and Forget it!”. Your future self will thank you.