Every investor would love to be able to time the stock market perfectly, buying low and then selling high.
Unfortunately, playing the stock market is just not that easy.
There are several strategies that investors can employ when decide to buy stocks.
But if you have a decent chunk of money just sitting around, you might be better off going all in and throwing everything into the stock market at once.
An AllianceBernstein blog post from July explained this argument, and they reiterated their point in a year-end review Wednesday. They compared historical returns from three investment strategies: putting a sum of money into the market all at once, dollar-cost averaging and splitting that money into equal monthly investments, and just holding cash. While dollar-cost averaging fared better on average than waiting on the sidelines, the clear winner is the front-loaded, lump-sum investment.
AllianceBernstein’s Seth Masters points out that investing immediate works better than dollar cost averaging “because stock markets tend to rise over time, so investing immediately wins on average.” Dollar-cost averaging means that you still have some of your money on the sidelines, and you can miss out on some big gains.
We’ve discussed the advantages of the dollar-cost averaging strategy before. This involves investing a fixed amount of money each month, no matter what the stock market is doing. The basic idea is that, even if the market takes a downturn, you’ll be buying more assets at a lower price, so when things recover, as they generally do, you’ll come out ahead.
This strategy works especially well if the capital you’re investing is coming in at regular intervals, as with contributions to a 401K automatically deducted from your paycheck.
It’simportant to note that, whatever your particular saving strategy, you should not sell and pull out of the market at every swing and downturn. In an October note, Gluskin Sheff chief strategist David Rosenberg pointed out that staying the course is important:
“Corrections are part and parcel of the investment process, they come and go, and it is imperative to take a deep breath and realise that what is most important for building wealth is not ‘timing’ the market but rather ‘time in’ the market.“
So, if you happen to come into a bit of extra money and you’re thinking about where you want to put it, taking the plunge and jumping into the stock market might not be a bad idea.
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