You know those people who say…”Is now the right time to get into the market?” or “The market is at its peak right now, I’m going to wait until the market comes back down?”. If you don’t know these people…that’s a good thing. Every single investor who thinks this way or thinks they can time the market are just plain foolish. I’ve touched upon this particular notion in another post…some of the best minds in finance cannot predict market fluctuations. Why? The securities markets possess too many variables. It is impossible to time the market. The simple solution? Dollar Cost Averaging.
I swear by this technique. The beauty of it is its simplicity. See…too many people fear finance and the markets because they realize how complicated it is. But I’m telling you…as an investor who knows their time horizon…investing can be very simple. A good investor just needs to know their risk tolerance and their time horizon. Everything else is just noise.
Dollar Cost Averaging Defined
Dollar Cost Averaging is the process or technique in which an investor establishes a fixed dollar amount to invest on a fixed schedule. For example, an investor will invest 100 dollars three times a month; on the 10th, 20th, and 30th calendar days. Using this method, an investor purchases more shares when prices are lower and less shares when the prices are higher. So instead of waiting around and trying to time the market, which is foolish, and investor will just buy in using increments on a regular schedule. Another intangible benefit here is one of the greatest benefits for an investor, peace of mind. Especially if the investor is investing into broad reaching holdings such as mutual funds or ETFs (exchange traded funds). Personally, I know that I have an extremely long time horizon and I invest into broad index funds. Therefore, I automatically invest during my regular scheduled days and just watch my funds grow. It’s simple, easy, and effective. Beautiful.
However, the investor’s investment objective (or time horizon) and risk profile must be realized. So let’s say you have a two year time horizon and you want to raise a certain monetary amount. You determine what type of investment to buy into, whether it be mutual funds, ETFs, a group of stocks, group of bonds, or individual securities (much more risky). The beauty of Dollar Cost Averaging is that an investor does not need to value whether or not the market is high or low at the time of initial investment. In addition, once the investor starts to make purchases on a regular and reoccurring schedule, the investor does not have to worry about when to get out of the market because they realize their time horizon.
When people talk to me about finance and they say ask if now is a good time to get into the market or is now a good time to buy an individual stock, I really just smile and say “it depends”. So bottom line, do not try to time the market and buy in with large amounts of money and then try to exit in an attempt to buy low and sell high. Frankly, these types of people usually do the opposite…buy high and sell low. In other words, they buy into the market hoping it is a good time but when the market dips they panic and sell. This is exactly what you do not want to do. What you want to do is be smart. Don’t do what everyone else tries to do because most people have no idea what they’re doing.
Bottom line…do not try to time the market. Dollar Cost Averaging for the win.