Sushi Money

After a grueling day yesterday, and an equally challenging year, many folks are wondering where the markets are headed.  It’s not fun to watch that retirement portfolio shrink over time, but for value investors the market may offer a strategic long-term opportunity.

The only problem is that most of us don’t have a spare chunk of retirment money sitting around waiting to be invested in strategic opportunities.  Even if we do, and as compelling as valuations are right now, it’s a pretty gutsy move to invest that chunk of change in a wildly volatile and dwindling stock market these days. 

Which makes the argument for dollar-cost-averaging a viable strategy over the long-term.  Dollar-cost-averaging basically means investing money at regular intervals (for example, $100 or $200 every month or $500 every quarter into a mutual fund). Regardless of what the stock market is doing, you simply keep investing money over time. How does this affect your portfolio over the long term?   In essence, you may end up buying more shares when stock prices are low, and fewer shares when prices are higher.  Over time an investor can theoretically accumulate a substantial portfolio with a lower cost-basis than investing a lump-sum otherwise.

Of course this strategy is based on the critical assumption that over the very long term, the equity markets will go higher.  And historically speaking that is true: The stock market has always gone higher over the long term, typically beyond 10 year periods.

But what about dollar-cost-averaging when the market is falling over a period of years?  Doesn’t that mean we are buying high as the markets keep falling lower over time?   Well it may seem like that, but again based on the assumption of a future rising market, we will still have purchased more lower priced shares when the markets are down.   The average price of the shares purchased is lower over time as markets go down.   It’s correct that dollar-cost-averaging will not keep us from losing money if the market keeps going down.  But the more shares you buy at lower prices, the greater the profit will be when markets do rise and share prices go back up. 

Some of us invest money in larger chunks, less frequently. Could that be a better strategy? It might mean that we can lose even more money in a falling market, or make more money in rising market.  But how do you feel about “market timing”?  Most of us cannot time the market very well at all, and when emotions are brought into the equation we have a prescription for losing money when buying and selling at the wrong times.

That’s another reason dollar-cost-averaging may help the average investor succeed over time:  It removes the decision and emotion from investing at some perceived “right time,” and becomes a routine, automated process that helps us accumulate shares of stocks or mutual funds without worrying about market timing.  We’re doing it for the long-term and building a portfolio for the future.  Dollar-cost-averaging can turn even the most undisciplined spender into a disciplined investor.

But many financial professionals disagree (here, here and here) and see lump sum or other investing styles as better alternatives.  They argue that a lump sum can be allocated more strategically to create an investment portfolio that will outperform dollar-cost-averaging over time.  That may well be true and in that case, maybe it’s more a question of what you invest your money in and/or when you invest your money.

“If you were looking for an easy way to boost your returns over time, dollar-cost averaging probably isn’t it. The stock market generally rises over long periods. That being the case, you’ll usually do better investing all at once, as long as you’re investing for the long run.”

“Dollar-cost averaging typically does best when an investment goes sideways or down for years and then, at the end of a period, suddenly breaks to the upside.”

Sound familiar the past few years?  When the markets do turn around, many dollar-cost-average folks may be quite pleased with their portfolios.  Heck, we’ll all be pleased with our portfolios when the markets turn around.  But we’re not talking about how to invest a spare $20,000 sitting in the bank. We’re talking about saving and investing on a regular basis over one’s working years in order to build a retirement portfolio.   

And what are most people going to do with their paycheck’s allocation for investments anyway?  Put it in a measly money-market or savings account, losing money to inflation in order to accumulate a large “lump sum” and one fine day invest it in the hope that a strategic, well-timed investment will achieve a better return than dollar-cost-averaging? 

Maybe it will.  If I won the lottery tomorrow, I would indeed find a few professional money managers and have that lump sum allocated for both long-term growth and capital preservation in accordance with my personal financial goals.  But for most people, on a regular basis, I believe dollar-cost-averaging works just fine.

What about the economy? Of course many people are still worried about the family economy and the stock market, and we wonder how our retirement portfolio is going to grow.  No one has a crystal ball, and the last decade has been very challenging for investors.  Will it get better?  Will the markets roar back in a few years as the business cycle improves?   

I think the answer to those questions depend much upon your outlook on life and the future of the nation as a whole.   Some of us may be near-blind optimists wearing those rose-colored glasses as we look at the long term.  As such we base our choices (and retirement planning) on assumptions that frame the future with that context.  

Naturally that optimism should be tempered with a realistic assessment of the investment climate over the years, which means there are measured choices about risk tolerance, investment strategies and portfolio allocations.  And regardless of one’s optimism, investing and saving for retirement is a choice.  It’s a choice about how much money to save or invest, and how or where to invest it.   It doesn’t matter if it’s a lump sum or a regular monthly investment: You still have to choose how to do it.  You still need a long-term investing strategy to build that retirement portfolio. 

More importantly I believe we’re making choices that will determine the strength and security our future retirement years.  Am I satisified with my portfolio while watching my investments lose money?  Absolutely not.  But it won’t always be that way.  How many people honestly believe the future of our economy, even our nation’s future, is destined for financial ruin and chaos?   Some people are indeed that negative about our future.   

But without apology, I am not one of those people.  I believe in the strength of this nation, our long term economic prospects and a bright future that is filled with growth and opportunity for our children.  Call it blind optimism if you will.  I call it having a disciplined faith and conviction to succeed based on the courage and strength of generations that have come before.  And I will invest accordingly.  Have a great day.

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