Posted:
7/26/2017
By William G. Lako, CFP® and Shawna L. Theriault, CFP®, C.P.A.
In case you missed the news, the markets have hit several new all-time highs recently. While that’s wonderful news for those who are invested, it poses a problem for investors with new money. Those with an inheritance, an insurance settlement or a bonus, or those who just rolled over an account have the challenge of deciding when to invest their cash into the market.
We generally recommend dollar cost averaging (DCA) your money into the market. When you DCA, you invest a fixed dollar amount at set intervals over a long-time period. This method often lowers your average cost per share by taking advantage of market lows and highs. However, when you have a market that is setting new records every few days, how do you choose when to invest? When markets are rising, DCA begins to feel a lot like market timing, i.e., trying to guess when is the best time to get in.
There is no right way to move money into the market that works across the board for every investor. First, think about your feelings toward the market. You may be bullish, thinking the market is going to continue to rise, while others may feel the market is well overdue for a pull back. This often determines how quickly an investor chooses to dollar cost average, i.e., monthly, quarterly or otherwise. When the market is at a high, some investors may want to use a little more time to become fully invested, especially if you consider that the market dips by 5 percent three times a year on average.
It is also important to remember to remain diversified across multiple sectors. You may choose to allocate less money to sectors that have over-performed while allocating more money to areas that have under-performed. You may also want to accelerate your investment into dividend paying stocks. Even if the market were to pull back, the dividend would still provide a cash flow.
When investing “rollover” money, you should also consider how it was previously invested. If the money has a long-time horizon before it is needed, you may want to accelerate your DCA schedule. Often when money is rolled over from a 401(k) or similar account with limited investment choices to an IRA, most investments are likely to be sold, so there could be a good bit sitting in cash. When the markets are consistently rising, dollar cost averaging may yield a lower return if you have money sitting in fixed income or cash yielding very little return. Given the current low interest rate environment, you may not want long-term money sitting on the sideline for very long.
Overall, when you DCA into the market, you are primarily trying to accomplish two things: lowering your average cost per share and minimizing the risk of entering the market at an inopportune time. While you may not accomplish the goal of a lower cost per share during a bull market, dollar cost averaging is still a relevant risk management technique.
It can be hard to place a quantifiable value on reducing the risk in a portfolio, especially when performance is trailing the market. It is impossible to know what the market will do on any given day; therefore, we would almost never recommend going all in at once. If reducing the risk in your portfolio is an important part of your investment plan, dollar cost averaging regardless of the market conditions is a good method to follow.
William G. Lako, Jr., CFP®, serves as a principal at Henssler Financial. Shawna L. Theriault, CFP®, C.P.A. is a Managing Associate at Henssler Financial, specializing in assisting high net worth individuals, families and businesses in tax, financial and estate planning. Both Lako and Theriault are Certified Financial Planner™ professionals.
Founded in 1987 by Gene W. Henssler, Ph.D., Henssler Financial provides solutions for individual, corporate and institutional clients that incorporate a range of services, including wealth management, financial planning, tax preparation and consulting, small-business retirement planning and estate planning. www.henssler.com
William G. Lako, Jr., CFP®
Shawna L. Theriault, CFP®, C.P.A.
