When it comes to investing cash you have 3 choices:
- Invest it as a lump sum all at once
- Average it in over time (dollar cost averaging)
- Wait for a pullback (buy the dip) and invest it then
Statistically we know that investing a lump sum in equities beats dollar cost averaging 75% of the time. And we know that dollar cost averaging outperforms a buy the dip strategy 60 -75% of the time. So it seems like a no brainer to go ahead and put that cash to work all at once. In volatile markets like these that can be a scary prospect though. Right now it seems like the economy and markets could easily get worse before they get better. The good news is you don’t have to choose among these three strategies. You can take a hybrid approach, which combines all three. We know that putting money to work and keeping it invested for the long haul is the most important step one can take towards building wealth, regardless of the exact timing of how you get started. So while statistics tell us that investing a lump sum all at once is a better strategy 75% of the time, it really hurts when you put a lump sum to work and then the markets crash, 20, 30, 40, or 50%! For many clients, they only have a large sum to put to work once or twice in their lives so the pressure feels much greater than a robotic approach to investing might suggest.
Rather than try to time the markets or live in fear of bad timing (unless you have an extremely strong stomach), for most clients, we would generally recommend utilizing a hybrid approach at times like these. Put some money to work as a lump sum. Then average in the remaining balance over 6 to 12 months, and accelerate those contributions for every additional 5% pullback from market highs. It’s a bit complex and requires a bit of extra effort on our part but it takes advantage of the best of all 3 strategies. There will be plenty of times when you wish you’d gone all in at once with a lump sum rather than a strategy like this but hindsight is 20/20 and more importantly a hybrid approach to putting money to work is one that most clients can feel comfortable committing to without fear of major short term regret.
The forgoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opions are those of Katherine Reisfeld and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.