Pretend you took a beating in the bear market of 2000-2003. Also
pretend you have nine other friends who suffered along side of you.
Now pretend today that someone asked all 10 of you whether or not
it is an opportune time to buy individual stocks and stock mutual
funds.
Fact: The market went way down. Fact: The market has done well
for most of 2003. Fact: Some impatient guy with a smirk on his face
just asked you the above question. Well? Are you going to slobber
out some half-hearted wishy-washy double talk, as the others most
likely will do? Or do you feel bold and opinionated?
Pretend you took a beating in the bear market of 2000-2003. Also pretend you have nine other friends who suffered along side of you. Now pretend today that someone asked all 10 of you whether or not it is an opportune time to buy individual stocks and stock mutual funds.
Fact: The market went way down. Fact: The market has done well for most of 2003. Fact: Some impatient guy with a smirk on his face just asked you the above question. Well? Are you going to slobber out some half-hearted wishy-washy double talk, as the others most likely will do? Or do you feel bold and opinionated?
Maybe the market has fully bounced back from its base and provides little upside potential. Or perhaps stocks have only just commenced their climb to the sky and still allow for substantial upside gains.
Whatever the case, I would have to agree that this is a perplexing prognostication, especially if you are gun-shy from having absorbed recent painful losses.
However, what if lower interest rates, lower oil prices and a business-friendly tax code produce enormous wealth and stock purchasing is rampant? Yeah! On the other hand, what if the economy is moving too fast and possibly headed for Carteresque interest rates and inflation Ouch! Two minute warning – you must answer the question.
How about this idea? Let us tell the inquisitive Sam Donaldson to get lost, because I have what might be a better way. It is, “Dollar Cost Averaging.”
If you invest in a 401(k), a 403(b), an annual IRA/SEP IRA or any other periodic investment into the stock market, you are “dollar cost averaging” already. If you are not doing this now, you still can.
Quite simply, dollar cost averaging is designating periodic (usually monthly), funds into the stock market, normally on the same calendar day each month. Some months, you may invest at a low price; some months, perhaps your price is higher. Overall, your average cost of shares will be somewhere in between. While you may miss the ideal situation of investing all of your funds at rock bottom levels, you may also avoid the worst-case scenario of investing at peak prices. As a result, you will likely earn a productive rate of return and be pleased from a long-term standpoint.
Dollar cost averaging does not assure a profit and does not protect against loss in a declining market. Such a plan involves continuous investment in securities regardless of fluctuating price levels. Investors should consider their financial ability to continue their purchases through periods of low price levels. And beware! Do not use dollar cost averaging if you are digging for gold. This is a long-term investment strategy.
The beauty here is that you are not being wishy-washy. Rather, I believe you are being clever. My answer to the original question is that it can always be a good time to buy stocks and stock mutual funds. For the long-term investor, why not dollar-cost-average? It is an answer to anxiety with the volatile stock market of the modern era. This is a perfect strategy for 401(k) and most retirement planning vehicles. It is also an excellent way to calmly sock away a little each month for the kids or grandkids.
Through good and bad markets, my wife and I have plowed away quite a bit over the past seven years for our daughters. Moreover, after a few months of adjusting to it, the monthly outflows from our checking account are pain free.
Regardless of your age, if you are uneasy about your future cash position at retirement, consider utilizing a dollar-cost-averaging program. Call your financial planner to run a calculation for you. My money says you will be surprised at the potential positive compounding effect of your investment dollars.
So, take away the market timing decisions. Stop watching the daily grind of market choppiness. Subtract the sleepless nights. Instead, go about your personal business in life and let the market do the work for you. If you are patient, your nine comrades will see the light as well.
