Time, Not Timing

Dollar-Cost-Averaging, or DCA is an age-old strategy of regularly investing money in the markets to ease investment price risk. This technique is commonly used by 401(k) plan savers. It can also be a useful strategy for experienced investors with larger sums, especially during periods of uncertainty or when emotions around volatility run high.  

DCA involves regularly investing a consistent amount of money to purchase a specific asset, or group of assets, regardless of their price. For example,  employer-sponsored 401(k) plansare set up this way. With each paycheck, you invest a regular percentage of your earnings in defined assets, generally mutual funds, that you have previously selected.  

This disciplined strategy helps reduce angstabout when to invest in the market. Regular investments keep you from focusing on whether it’s the optimal time to purchase shares. With the DCA approach, rather than trying to time the market, you buy at regular predetermined intervals.  

The theory is that asset prices go up and down in unpredictable ways, and if you buy shares regularly, the average price won’t be too high, thus the name “dollar-cost-averaging.” When prices are lower, your investment dollars will buy more shares. If prices are higher, will buy fewer shares bringing the average price-per-share cost down. This may help reduce the impact of market volatility on your portfolio. 

Benefits 

For younger savers, regular investing creates a habit of consistently adding to your portfolio. For those with larger cash balances, this is a way to invest or reinvest over time. As interest rates decline, cash tends to lose its value over time due to inflation. Dollar-cost-averaging (DCA) can help reduce the emotional impact of loss aversion which can lead to inaction and staying in cash.  

Lump-sum investing can be an effective strategy given certain market conditions but may not be for everyone due to volatility. In a rising market, particular assets may increase in value more than others. Investing a lump sum could allow you to acquire more shares, and therefore more value compared to the DCA technique. But if you invest all your money at once, and prices drop, you may suffer losses that could last for a few years or longer. Under these conditions, DCA would lead to owning more sharesthat could be poised to increase in value in the future. 

Knowing your risk appetite as it pertains to your investment strategy and financial planning process depends on factors. These include time horizon, available cash, market conditions and investment opportunities. Discussing and weighing these considerations with your CERTIFIED FINANCIAL PLANNER® Professional can help you make a choice that is right for you. It’s time in the market that matters, not timing the market. Stay focused and plan accordingly.