If you’ve got money to invest or are planning on starting a retirement account, does it make sense to wait for a “good time” to invest?
After all, we’ve all heard that iconic investing mantra, “Buy low and sell high.” So it stands to reason that there must be better opportunities than others to buy into the market. However, how literally should this advice be taken?
In this post, we’ll explore the question of whether to invest now or if there are certain times that can make more sense. Furthermore, we’ll see what kind of effect this choice can have on your investment portfolio.
Why the Perfect Time Doesn’t Exist
There are many stories about investors who bought a stock, fund, or crypto at exactly the right time and made millions. One of my favorites surrounds what would have happened if you had bought Apple back when Steve Jobs returned. If you had bought $10,000 worth of Apple stock (ticker: AAPL) 20 years ago, those shares would be worth around $6.62 million today (assuming reinvested dividends).
While sensationalized scenarios like this can certainly highlight the benefits of investing early in strong companies, they also tend to give investors a false sense that some “perfect time” to invest exists. However, that’s a myth.
The greatest problem with waiting for the perfect time is that none of us can see into the future. We don’t know if the market will go up or down the next day let alone in a year or even ten years from now. There are a multitude of factors that easily influence the value of a security – many of which have nothing to do with the company or fund itself. The COVID pandemic was a great example of this.
Sure, a stock may be trending near a 52-day low price and seems like a great time to buy. But that doesn’t always mean it will automatically go back up. There’s always the possibility that a stock on its way down may continue to do so – especially in the case of companies that are in financial trouble.
For instance, consider the retail giant Bed Bath and Beyond who filed for bankruptcy in April 2023. Less than ten years ago their stock price was as high as $78. Today it trades for pennies.
For this reason, most financial professionals recommend that investors instead practice a strategy called dollar-cost averaging (or DCA). Dollar-cost averaging is the simple practice of contributing to your retirement or brokerage account little by little at defined intervals – no matter how the markets are doing.
A good example of dollar-cost averaging is when working Americans contribute to their 401(k) plans. Every two weeks when they get paid they’ll automatically put some of their money into the account. Little by little they build their nest egg by incrementally investing along the way.
Why DCA Outperforms Timing the Market
Skeptics may say, “But what if you’re an investing wizard? What if you did your homework and picked certain investments at specifically the right time? Wouldn’t that give you an edge over a simplistic strategy like dollar cost averaging?”
According to analyst Nick Maggiulli, the answer would still be “no”.
The author of the book “Just Keep Buying” and Chief Operating Officer for Ritholtz Wealth Management LLC posed this exact question in a blog post titled Even God Couldn’t Beat Dollar-Cost Averaging.
His premise was simple: Imagine sometime between 1920 and 1979, you go back in time and invest in the stock market for the next 40 years. Would your portfolio outperform someone else who used dollar cost averaging?
As it turns out, the issue isn’t so much about “when” you buy as it is not buying at all. In his article, Maggiulli describes that each time an investor buys at the dip (i.e. when the market hits bottom), it takes months or even years before you invest again.
This causes the investor to miss all the time in between when prices are rising. Just because these increments weren’t exact dips doesn’t make them bad times to buy. In fact, a parallel investor practicing DCA comes out ahead 70 percent of the dip buyer because they capture all of these missed opportunities.
To put it simply, waiting for those perfect market dips causes that investor to essentially get left behind. This is true even if they had known exactly the precise times to buy. Hence, the data suggests steady automatic DCA is the better path forward.
Other Benefits of Dollar Cost Averaging
Aside from building the greatest portfolio size you can, there are several other advantages that DCA can offer. Consider the following.
- Easier to contribute – Rather than trying to save your money until it reaches some large amount, DCA allows you to make smaller contributions. Even just a few dollars per week or month will compound over time. To get the largest amount possible, use a budgeting app such as Buxfer to track your spending habits and discover where potential improvements could be made.
- Removes emotion – Perhaps the greatest benefit that DCA provides is the fact that it takes any emotional resistance out of investing. It can be unnerving to see the stock market crash and want to buy more stocks because it feels like you’re throwing good money after bad money. However, times like these are precisely the ones that you’ll want to take.
- Consistency – By making regular contributions an investor will be statistically more likely to capture all of these market low-price moments. As we covered in the example from Maggiulli, this is a better approach than attempting to time the market – even if we knew ahead of time when those market dips would be.
To summarize, there will always be those people who earn several multiples beyond their initial principal investment. However, those lucky few are more or less outliers. For the grand majority of working people who are not financial professionals, it’s safe to assume that a practice such as dollar cost averaging will be more productive.
What’s important to remember is that investing is not always about chasing after the greatest return. Sometimes just being consistent and not trying to outsmart the system ends up delivering better results. Dollar-cost averaging is certainly one of those easy-to-use strategies that can help you accomplish just that.
Featured image credit: Unsplash
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