When In Doubt, Dollar-Cost Average - 2nd Quarter 2023

Dear Valued Client,

I had considered simply titling this piece “Leveraging Dollar Cost Averaging: A Smart Strategy for Investors in Down Markets” but I wanted to stress a certain word in the above title: “Doubt”. Doubt is likely the single biggest culprit that puts a drag on long-term investment returns for portfolios of any given retail investor...That’s you 😉. “Ok, how?” you might ask. I would posit that it really revolves around our human psychology to want to participate in things at times when it seems like everyone around us is doing the same (FOMO) and likewise, avoidance when things appear to be proverbial lepers. The stock market is not only a good marker in this respect, it might also be the best example of this phenomenon we have in modern-day society.

“You’re making everyone sound like sheep, Jay”.

We are not sheep. I have certainly reached a point in my life where I’m willing to admit that I know so little about the greater scope of the universe and all that takes place here on our homebase earth and yet I can say with the utmost confidence that we are in fact humans and not sheep. But AS humans, we maintain a certain sociability, cooperation and sense of community...for better and for worse. It has been merely an observation of mine over the past 15 years that right before any type of market crash, people in general seem to be almost on a sugar high for investing in stocks? My mind goes back to a handful of check points even in my 15 years as an advisor where I would get phone calls with inquiries about investing in specific tech companies, bitcoin, SPACs (don’t worry if that one doesn’t ring a bell) and any multitude of other “risk-on” types of investments. From my experience, these checkpoints generally marked a point in time where the markets were set up for a major correction and subsequent lull where NOBODY wanted to touch stocks with a ten-foot pole.

Do you see where I’m going with this? The average investor, left to their own devices has a strong propensity to take ON risk when markets are priced relatively high and to take risk OFF the table once their investment portfolios have already sunk to temporarily lower prices...the complete opposite of what one wishes to accomplish in practice with their investment portfolio.

What if I told you there was a system we could implement with your investments that not only focuses on removing the psychological burden of "timing the market"  but also focuses on improving your returns if the market sinks temporarily? Welcome to Dollar-Cost Averaging.

What is Dollar Cost Averaging?

Dollar cost averaging is an investment technique that involves systematically investing a fixed amount of money at regular intervals, regardless of the market's performance. Rather than attempting to time the market, this strategy focuses on consistency and discipline. By investing the same amount regularly, investors can take advantage of market fluctuations and potentially benefit from lower prices during downturns.

 For those of you who are participating in a 401(k) or 403(b) plan in your workplace, take some comfort in knowing you’re already doing this. Those monthly contributions come out of your check each and every month thereby constantly investing money into the markets whether it’s priced relatively high but ALSO when things are ugly in the short-term. This is one of the key drivers of why someone’s 401(k) plan has the potential for being the single biggest wealth-accumulating machine; the combination of not only investing money for a long period of time but also investing no matter what is happening with the markets. So, let’s instead focus the remainder of this discussion on those that are closer to retirement or simply have lump sums of money where they are seeking consistent returns. Furthermore, let’s play devil’s advocate for a moment and address some of the tried-and-true phrases, doctrines, and sound bites that investors hear regurgitated endlessly from financial advisors:

“It’s called long-term investing because it’s for the LONG-term.”,

“You've got to STAY invested to make returns consistently.”

 “It’ll all work out fine if you just leave your money in the market”.

I will confess that I've uttered all of these common coaxing catchphrases over the years but I now believe that as advisors, we’re doing our clients a disservice if we don’t further that passive advice with something more proactive...take advantage of lower market prices when it fits your objectives.

We’ve already talked about the discipline and patience that is necessary to ride the roller coaster that is the “stock market”. If your objective is to grow your wealth and you are in a position that allows you to invest additional funds into your financial goals, an important consideration is to invest consistently, even through the ups and down of the financial markets. The exact amount of that on-going, systematic contribution will depend on your specific financial plan but as we continue to wade our way through this very interesting era that we’re in of higher interest rates, a looming recession, resurging international markets and a declining dollar. This diversification strategy is designed to reduce the overall volatility in your portfolio while still striving to enhance the returns. Look forward to talking soon.

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