The Argument for Dollar Cost Averaging

Question:

Vanguard shows that if I have a lump sum I would be better investing all of it. I know you have said dollar cost averaging is better. What gives?

Answer:

If the market is going up, why not sink all your money in, right? You know the exact date to do so, right? Wrong.

We believe these arguments against dollar cost averaging come into play during consecutive years of positive returns. Investors tend to lose sight of the market’s volatility. Dollar cost averaging is the investment method of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. When prices are low, you buy more shares, and receive fewer shares when prices are high. In the long run, you should pay a lower price per share than if you had bought your shares all at once.

In general, most investors do not have a lump sum to invest. Most people accumulate assets as they save over time. Rarely will investors come to us with a lump sum. Dollar cost averaging helps investors mitigate risk. We’ve done studies that show if you dollar cost average over the worst periods for the stock market, you could still make money. Investing is hard when the market is doing poorly. However, the process of dollar cost averaging regularly takes the emotional decision out of investing.

Let’s say you receive a $10,000 bonus and you want to put it all into the market at once. Next year when you receive a $10,000 bonus, you do the same. Essentially, you are dollar cost averaging at $10,000 a year.

One of our favorite examples to consider is Mercedes. If the price of the luxury car were cut by 50%, people would be rushing down to the dealers to buy one. However, when stock prices are slashed 10% or 15%, investors are eager to get out of the market. We view market dips as an opportunity to buy stocks on sale.

We also find investors who invest all at once tend to focus on one industry. If Utilities are up 20%, investors want to be in that industry. However, when a particular industry had experienced outpaced growth, it will likely return to normal. We feel if you must invest all at once, you should consider an index fund to remain diversified.

If you have questions regarding your investment strategy the experts at Henssler Financial will be glad to help:

• Experts Request Form
• Email: experts@henssler.com
• Phone: 770-429-9166.

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