Timing the market is a bad move.
Unless you are a student of Warren Buffet and have extensive experience in money management, I suggest forgetting about what the dollar is doing, worry not about the upcoming election (as if things really change when a Democrat or a Republican wins the White House), and stop waiting for the Dow to drop 250 points so that you can put your money in at the “right time.”
There is no “right time”, except now.
If you have money sitting on the sidelines, (i.e. a savings account, CD, money market) and are thinking about investing it for the long term, but only “when the time is right,” you are making a big mistake. According to recent figures I’ve read, there are over 2 trillion dollars on those “sidelines” just eroding away due to inflation and taxes. If you recall a recent article I posted, inflation has averaged almost 5% over most of the past century according to the Consumer Price Index (CPI) and I don’t anticipate many instruments at the bank getting that for you long-term (yes, my local credit union is offering a glorious 5.6% APY on a 12-month CD, but I said long-term). Furthermore, if you account for an after-tax net rate of return, based on your income, you could be getting less than even that. Remember, if you don’t beat 5%, you lose to inflation.
Jump into it!
I advise you get educated about your investments. I also advise hiring the help of a financial advisor. But, nevertheless, I strongly encourage you, should there be an internal debate going on between you and the voices in your head, to tell them to shut up and start playing the investment game. Those who get in usually win, provided they diversify, use an asset allocation model and make sure their investments are in line with their risk tolerance.
“The stock market is a great wealth distribution tool. It distributes wealth from the impatient to the patient.” – Warren Buffett
I find it quite fickle that Americans, in general, tend to get in when the getting is good, and then jump out when the times get tough. We should all know by now the key to buying and selling of any investment is to buy LOW and sell HIGH.
So why do so many of us get cold feet when we know the time is now to jump in? It could be psychological, maybe just a brain fart, but whatever the case may be, we don’t do what we should and then wonder why the rich get richer and the poor get poorer.
Now, I may be challenging some of our readers’ ideologies, but I have a solid background in economics and know firmly that wealth is created, not just distributed. When we distribute wealth, we shave off about 20% of it due to bureaucracy and red tape. Bill Gates, last I read, was worth just over $50 billion. This does not mean that the world has $50 billion less. It means he created it. Just like carrots grow from the seeds planted prior, your wealth can too. Someone doesn’t sacrifice their income because you invested and generated income. You can, and should, create it by planting the investment seed.
What type of investing should you partake in?
I don’t care. So long as it is in accordance with your risk tolerance, investment timeline, and is based on an educated strategy, get into the game and chances are, your seeds will grow to feed your investment hunger.
Don’t wait. I don’t care if Hilary or Barack or Rudy or Mitt preside over our country (it was much more Bill Gates than Bill Clinton who can take credit for the booming 90s, and George Bush can take little credit for the comparative economic boom after the market drop post-9/11), eventually, in our system, you will make more if you just get in.
Do keep in mind that there are no guarantees in the market, be it stock, bond, real estate, whatever. There are opportunities for loss. But overall, for just about any period in our country’s history (and the future should be no exception), business has triumphed and made riches for those involved.
Dollar cost averaging is the practice of investing or saving money at specific times, regardless of market conditions or your personal financial outlook.
According to author Joshua Kennon, “Dollar cost averaging is a technique designed to reduce market risk through the systematic purchase of securities at predetermined intervals and set amounts.”
Let’s suppose that you just got a bonus and now have $10,000 to invest. Instead of investing the lump sum into a mutual fund or stock, you decide to use dollar-cost averaging and spread the investment out over several months by investing $2,000 a month for the next five months. This averages the price over five months, so some months you may buy fewer shares, each at a higher price, and some months you may buy more shares, each at a lower price.
If the market is lower this month, you may lose money on the shares you bought last month, but this month you receive more shares, which, in the future, will help offset any losses. With DCA, you are able to take advantage of any low during these five months, guaranteeing you to invest at the very bottom because when it comes, you are simply doing what you do every month. Once the market turns around, which it is likely to do in the long term, you’ll be ahead. The best part is you didn’t have to do any predicting! If you were to try to forecast the bottom, you could miss it altogether and risk putting your entire $10,000 in at a bad time.
Might I suggest throwing away the timing and getting into the game? Regardless of what you play, it is clear that how you play can make a significant impact on your financial situation. Not playing will have the worst impact. Playing with a great team (financial advisor) should score you the win at the end of the game.