No one can predict the stock market. Last year at this time, I doubt anyone ever thought the S&P 500 Index would be up 30 percent in 2019. With the early 2019 federal government shutdown, the late-first quarter yield curve inversion, and the year-long saga of trade negotiations with China, most investors expected 2019 to be a bumpy ride. While we saw some volatility in June and August, those who invested and stayed the course were likely pretty pleased with their 2019 annual returns.
However, when you have a market that is so strong, how do you invest? When so many stocks look overvalued, how do you make the decision to buy? You can’t really wait for the market to drop 10 percent, as the market could gain another 12 percent before it declines.
While there is no right way to move money into the market that works across the board for every investor, I generally recommend dollar cost averaging (DCA) your money into the market. When you invest your money by dollar cost averaging, you are investing a fixed dollar amount at set intervals over a long time period. This method often lowers your average price per share by taking advantage of market lows and highs. You buy more shares of stocks when prices are lower, and fewer shares when prices are high.
Whether you are bullish and believe the market is going to continue to rise, or think the market is a bubble waiting to burst, your attitude toward the market and where you believe the economy is headed generally influences how quickly you choose to dollar cost average, be it investing monthly, quarterly or otherwise. When the market is at a high, you may want to invest less frequently, especially when you consider that the market dips by five percent three times a year on average. Then again, you may not want money you intend to grow for retirement sitting on the sideline for very long. If the money has a long time horizon before it is needed, you may want to accelerate your DCA schedule.
It is also important to remember to remain diversified across multiple sectors. The goal is to be invested in a number of dissimilar areas of the global economy that are competing for different shares of wallet. With this in mind, I recommend investors spread their market exposure across all sectors from high growth sectors like Information Technology and Consumer Discretionary, to the stable, less volatile issues in Utilities, Healthcare, and Consumer Staples. 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.
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. 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.