After the start financial markets have had this year, this is much easier said, than done. Spikes in volatility are normal for financial markets and they happen for a variety of reasons. When these spikes come, it is natural to call in to question what your strategy is. With a thoughtful strategy and time frame in mind, this can be viewed as an opportunity to buy an asset at a cheaper price. We work in a unique industry where, when assets are on sale, the investing public runs for the hills. If your investment strategy is not clearly defined, we see behavior that reacts to the emotional, short-term reality that can disrupt the bigger, long-term plan. It is human nature, and we talk a lot about decisions with money being more than just financial. Utilizing a dollar cost averaging strategy to combat short-term volatility may be just the solution you need.
Dollar Cost Averaging, or DCA, is an investment strategy where you invest a fixed dollar amount at a fixed interval over time. Many of us are/were using this strategy with payroll deduction in our retirement plans through work. When asset prices are higher, your fixed investment may buy fewer shares, and when prices are down the reverse is true, more shares are purchased. Using this approach can give you “time in the market” without the worry of timing the market, which is difficult. Utilizing a DCA approach can also help with the sticker shock of having one big purchase at a specific point in time. This decision can generate a lot of anxiety if a situation arises where you sell a home or a business and there are significant cash assets to deploy. Having the discipline to put a plan in place can provide some peace of mind in periods of volatility.
There is concern that many purchases at regular intervals may come with additional cost to the investor. While cost should always be a factor, understand that working with our firm and our platform, we do not have transaction-based fees. If the strategy works for you, we can easily automate regular contributions to your accounts, sometimes as easily as with a phone call. Detractors of this approach will say that if markets always move higher over a long enough period, you should get all your money to work for you immediately. The textbook might agree with that approach, but the textbook will also tell you to delay Social Security until age 70. Individual planning is unique to each household we have the opportunity to work with and the textbook recommendation rarely applies perfectly. If you’re interested in discussing whether or not DCA might be a good strategy for your situation, give us a call.
Dollar cost averaging does not assure a profit nor protect against loss. Investors must consider their financial ability to continue purchases through periods of low price levels.
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. (C) Twenty Over Ten