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Everyone knows the market goes up and
down. And, everyone knows it's best to buy low and sell high. But, you should also know
it's virtually impossible to time the market. And, even if you could, it probably wouldn't
make much difference over the long run. Don't believe me? Let's look at an example:
Each and every year from 1960 through 1995, Tracey Timer invested $5,000 in the S&P
500 at its low point for the year. Suzie Spender invested $5,000 each year at the
tippy-top. And Betty Bonus, as her name implies, simply invested her annual bonus in the
S&P 500 on July 1 of each year. In other words, Tracey had the most perfect timing
possible, Suzie the worst, and Betty had no timing at all. How'd they end up?
Tracey Timer: $2,615,866
Suzie Spender: $2,197,167
Betty Bonus: $2,476,729
So the difference in return between perfect timing and the most horrific timing imaginable
turned out to be a tad more than 1% per year. And if you paid no attention to timing and
simply invested at mid-year, you split the difference, and then some.
Dollar-cost-averaging is investing equal amounts of money at regular intervals, usually
monthly or quarterly, no matter what the market is doing. This way you buy more shares
when prices are lower and fewer when prices are higher, which reduces the average cost of
your shares. In fact, the more volatile the market, the better dollar-cost-averaging
works!
Some mutual funds are by nature more volatile than others - small capitalization and
international, for instance. Dollar-cost-averaging can be a major factor in enhancing your
return in these types of investments. Yet, most investors don't appreciate the simple
beauty of a DCA plan. Instead, they're trying to figure out when tech stocks will
"correct" by 10%, and if the time is right to invest in utilities. The clueless
dollar-cost-averager, who has no sense of where the market is, or is going to be, will
inevitably time the market perfectly.
Over the long term, the general trend of the market has been up. But, as with most things
in life, there are no guarantees. You could exercise and eat right and still be run over
by a truck. Dollar-cost-averaging won't work if you are forced to sell your shares when
prices are down. You should consider dollar-cost-averaging a long-term strategy and invest
an amount you won't have to withdraw for short-term needs.
Michelle H. Wilbers, a noted expert in
financial services for women, is a Registered Investment Advisor and owner of Women's
Financial Services, a company
dedicated to providing women with sound financial advice. Women's Financial Services does
not provide legal or tax advice. You should always consult a qualified professional for
advice regarding your particular situation. |
