Buy Low & Sell High is the age old investment advice, however picking the low time to buy a stock is an extremely difficult task to accomplish.
The uncertainty of the market and not knowing which way a stock will move can create an emotional drain on investors. There is a very good strategy to help take the emotion out of the decision and streamline line your investing decisions regardless of if the market is high or low: Dollar Cost Averaging.
Dollar-cost averaging is the process of investing a fixed dollar amount on a regular basis, regardless of the market fluctuations.
This is an emotionless and disciplined approach to be more efficient in the way you invest. It's not an overcomplicated process and can be as simple as investing $300 on the 15th of every month in XYZ. When the market is up, your $300 will buy fewer shares, but when the market is down, your money will buy more shares.
With the Example above, the investor purchased $1,500 worth of XYZ stock over a 5-month period. By dollar cost averaging they saved $1.51 cents per share or saved 6.04%. By implementing this strategy, they bought at a 6% discount instead of buying all $1,500 in month one when the share price was $25. If the investor would have bought all shares in month one, they would have had 60 shares at a purchase price of $25.
Dollar Cost Averaging works over the long term because prices tend to rise in the market, but not rise in a straight-line process. Instead, markets tend to run up to new highs and then pull back and typically do not follow a predictable pattern.
Dollar Cost Averaging can help you deal with the psychological dilemma of timing your investment choices. At Creekmur Wealth we have many clients who make monthly contributions every month which are invested when received.
This is allowing those individuals to dollar cost average into the market without worrying about if the stock is up or down. This is a very good strategy for individuals who have a large lump sum to invest or those who want to start small with monthly deposits.
One simple way to use Dollar Cost Averaging is in your workplace retirement plan (401(k), 403(b), etc). These systematic contributions are the definition of dollar cost averaging. A pre-established amount is taken out of each paycheck and funneled to your 401(k). These contributions are buying into mutual funds on a regular basis at the current price.
We can now advise on your workplace retirement plan. Whether choosing the investments or helping with the contributions, we can assist with your 401(k).
So, should you keep investing when the market is down? We would say, "Yes!"
As a matter of fact, we might suggest that this is a good time to consider increasing your contributions. When the market is down you will buy more shares at a lower price. You will be participating in the buy low strategy that investors try to accomplish.
We can help you create a personalized plan for systematic investing whether you have a lump sum or want to set up a strategy for monthly contributions. Please give our office a call to schedule time to discuss this strategy and how it can help you in the future.