Sincere people ask themselves and others this question regardless of market conditions: “Is now a good time to invest?” We’ve always believed (resoundingly and without exception or hesitation) that “Yes, now is a great time to invest!” Why such extravagant confidence? Because the plethora of historical evidence supports it and because the only alternatives to “Invest now” are “Invest later” or “Invest never.” Sadly, smart and thoughtful people too often do the wrong thing.

Historically, the broad U.S. stock market has had positive returns in about 70% of calendar years. No one has consistently predicted those 30% of the years it will go down. So, in other words, uninvested idle money penalizes you more than two years out of three.

“But wait, this time is different,” you say. “What about the presidential election? The economy? Inflation? The federal deficit? The war in Ukraine? The Middle East unrest? Future tax laws? Environmental disasters? Open borders?”

The world has always had a laundry list of things to worry about. Acting on the belief that “This time is different” typically causes enormous financial harm when people wait to invest and miss 70% of the years when the market advances.

As of this writing, the broad U.S. capital markets are at record highs. The S&P 500 is more than eight times its March 2009 value. The tech-heavy Nasdaq is more than 14 times higher over the same period. Did your portfolio keep pace? If not, we bet you weren’t fully invested over that period. We can’t find academic evidence supporting jumping in and out of the capital markets, as it’s a fool’s errand. Once committed to a diversified portfolio, stay the course regardless of the headlines.

How to Handle Windfalls

On rare occasions, someone receives a large amount of cash all at once — for example, upon selling a veterinary practice or home or from an inheritance or life insurance proceeds. Should the recipient invest that big lump sum all at once or do it slowly and regularly over time?

Most of us are comfortable having hundreds of dollars subtracted from every paycheck to fund our workplace retirement plan. And very smartly, most of us stick with it through thick and thin, good times and bad, regardless of the day’s news. It’s another thing entirely to contemplate putting thousands or millions of dollars into the capital markets all at once.

Lump-sum people always ask, “Is now a good time to invest?” The answer is always “Yes!” The math and historical evidence support investing the entire lump sum all at once. Yet, that tactic seems risky to some folks. If you invest a lump sum today, the broad capital markets might plummet by 50% tomorrow. At that point, you rightly will feel very sick. That’s why the thought of gradually investing a lump sum is more comfortable emotionally.

Manage the Risk of Regret

Dollar-cost averaging, or investing a fixed amount at regular intervals, is an academically grounded strategy. It ensures catching the market’s downs and ups, buying low and buying high.

Dollar-cost averaging is a strategy for reducing risk rather than maximizing returns. It exploits Wall Street’s only certainty: Stock and bond prices fluctuate. Using dollar-cost averaging, you make the market’s natural short-term volatility work in your favor. Since the amount you invest remains constant, you buy more shares when the price is low during temporary downturns (“buy low”) and fewer shares when the price is high. As a result, the average amount you pay is always lower than the average price per share. It’s not magic, just simple arithmetic.

Of course, dollar-cost averaging cannot eliminate the risks of investing in financial markets. It does not ensure a profit or protect against a loss in declining markets, nor will it prevent a loss if you stop when your account value is less than the cost.

Carefully consider your financial and emotional willingness to continue investing during an extended market downturn. The program’s success depends on you making regular purchases. Don’t chicken out when the sky is falling.

While no method guarantees a profit if you sell at the bottom of the market, patient investors who contribute fixed amounts in regular installments reduce the loss incurred if the market declines sharply after a single large investment.

Similarly, don’t do it all at once if you decide to sell a portion of your holdings. Dollar-cost averaging is a rational way to exit or spend down your accounts upon retirement. Don’t run for the doors and sell out of equities. Instead, redeem shares gradually through a regular series of transactions. If you’re anxious about the markets, sell to the point that you sleep comfortably through the night.

We recommend that you not make significant, abrupt changes in your chosen asset allocations. Don’t abandon any asset class regardless of market conditions. Remember that equities (stocks) are your only option for outpacing inflation after taxes. Over longer periods, a globally diversified portfolio of stocks outperforms all other types of investments.

Systematic Investing

Although dollar-cost averaging means some of your money sits idly for months and might dampen your overall returns, it’s the most reasoned approach for the cautious investor. Why? For the following reasons.

• Gradual investing gets you off the sidelines. It doesn’t matter what the market did today or will do tomorrow, next month or next year. There’s no more waiting for the inevitable correction that never seems to come.
• Dollar-cost averaging helps you avoid regret. Experts in behavioral finance have long noted that investors get far more pain from losses than pleasure from gains, so they tend to be risk averse. If you invest everything at once and the market tanks, you lose money (albeit temporarily) and feel like an idiot.
• Gradual investing makes you more disciplined, and discipline is to wealth building what the sun is to flowers. Dollar-cost averaging gives you a plan for more self-control, and you’re less tempted to consume the money.
• By investing regularly, you’re less emotional about the market. Dollar-cost averaging is automatic, and you’re on autopilot. If the market drops, you comfort yourself by noting that you still have additional money to invest.
• Dollar-cost averaging forces you to invest in falling markets and helps you stay the course.

Getting Started

Are you ready to implement a time-tested wealth-building strategy? Sign up for your retirement plan at work and invest a set percentage or amount each pay period. If an employer plan isn’t available, investigate a mutual fund family. You don’t need a lot of money to get started.

Investing is a continuous lifelong process, not a series of periodic, one-off events. Regular investing over the long term reduces the impact of short-term market gyrations, attends to your long-term plan, and avoids spending assets on short-term wants or needs.

LEARN MORE

• “How to Handle Market Declines” (Capital Group): bit.ly/3ylwsXY
• “Elections and the March of Markets” (Dimensional Fund Advisors): bit.ly/4fHxezt