The stock market continues to inch its way up, touching record highs across indexes. There’s a broad and brewing sense of relief from when everything went sideways last April. Reflecting on what I could have done differently in hindsight since the infamous day of liberation, a couple of thoughts come to mind. Most notably was that I pulled back on the amount I was dollar cost averaging (DCA) into the market. I can’t help but think about the market gains I lost out on because I held cash on the sidelines, earning a risk-less 4% APY against the S&P 500’s 14% rally since the bottom.
Now with the market continuing to rally, I’m wrestling with whether I should resume DCA at my previous clip or wait for the next correction and make a lump sum investment (LSI).
What’s great about DCA is that it forces consistent investing regardless of market ups and downs, especially if done through employer payroll deductions. You’re not trying to time the market. You’re also not held to being super liquid and can invest as funds become available. Better to invest what you can than not at all.
But on the flip side, there’s an opportunity cost incurred on the cash you’re leaving out of the market as you slowly roll it in. Remember for long-term investors being out of the market is riskier than being in it. And there are studies showing that LSI outperforms dollar cost averaging two-thirds of the time over longer periods.
The bottomline is if you have a lump sum of cash that’s not committed to anything in the next 18 months, consider investing it all at once. But you’ll need to weigh it against the worry of a subsequent dip or correction. Will you stay the course if the market drops? Keep in mind, the market always goes up in the long run. Time in the market is key.
However, DCA makes a lot of sense when investing from your regular income, especially if it can help you overcome the psychological barriers to investing all that cash at once. Putting your more to work into the market is more important than achieving theoretical maximum returns.
“Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.” — Joel Greenblatt
Not sure where to start or know someone that could use the help? Avoid the dynamite factory and do them a favor: send them this article and the UVstocks.io link.
P.S. I'm sharing some investment information, but it's important to remember that what I'm providing is for informational purposes only and should not be construed as financial advice.
Happy Investing,
John
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