Dollar-cost averaging is the process of investing a specified amount of money into the market at regular intervals. The practice generally allows you to buy more shares when the price is low and fewer shares when the price is high. Over the long run, this should yield you a lower price-per-share average.
This process works best when the market is volatile. If the market were only going up, investing a lump sum all at once would be better because you’d capture the full rise; however, perfectly knowing what direction the market is going is impossible. Therefore, we generally recommend dollar-cost averaging your money when investing. Most investors save as they earn, making dollar-cost averaging the default way they invest.
But what do you do when you do have a lump sum of cash? You may have received a large bonus at work, a payout from an estate or insurance policy, or maybe you’re rolling over your 401(k) to an IRA upon retiring and need to liquidate the investments before transferring them to the new account.
We know you’ll be surprised to hear this, but how you move your money into the market will depend on your financial plan and your outlook on the economy. Let’s look at the situation of rolling over your 401(k) when you retire. You may not always have the option of moving assets from one account to another without liquidating them. Because the assets were already invested, it may not be a bad decision to reinvest all at once. However, if you need to reallocate some assets to fixed-income investments, this would be the opportunity to do it, especially if you’ll be drawing upon the account now that you’re retired.
If you are confident in your current allocations between fixed and growth investments, you could reinvest the growth allocation immediately, only missing a few days in the market. You may then choose to dollar-cost average your fixed-income portion—especially considering the volatility we’re seeing in the fixed income market. Currently, there is an inverted yield curve between the three-month Treasury and the 10-year Treasury, meaning the three-month Treasury is yielding more than the 10-Year. According to history, this is a strong indication we’ll experience a recession within the next 18 months. Even if the market isn’t immediately plummeting, this inversion warns that there are issues to be aware of in the economy.
If you suddenly received a lump sum that you’d like to invest, we believe that dollar-cost averaging is the way to go. The amount you invest, how often, and for how long depends on how much you have and your outlook on current economic conditions. Since we believe that volatility lies ahead, we’d recommend dollar-cost averaging over a longer period, which should allow you to capture the bottom and the initial recovery. The portion you don’t invest immediately into growth investments should be kept in short-term bonds. Currently three-month Treasury bills are yielding more than 4%, so even though you are taking your time to get fully invested in stocks, your money is still working for you.
If you have questions on dollar-cost averaging your money into the market, the experts at Henssler Financial will be glad to help:
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- Email: experts@henssler.com
- Phone: 770-429-9166
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This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
