Lies, Lies and Statistics. The best time to invest.
One of the most common questions we’re asked here at Montgomery concerns the timing of one’s investment, be it an initial amount or a further contribution. “Should I invest now or wait until later, when hopefully the market falls?”
I’m sure we’ve all contemplated it. By definition, investors currently sitting on the sidelines are unsure whether to commit funds to the equity market. And given we are facing a world awash with of debt, low growth rates, potentially rising interest rates in the US and in some corners, elevated equity prices, hesitation is understandable.
But hesitation can be costly. How does one reconcile the need to invest in extraordinary businesses with the fear of a subsequent decline in prices? Does one invest it all now, dollar cost average in a set amount each month/ quarter over say a 6 – 12 month period or time the market by waiting until the market falls – and then enter at the bottom of course?
Dollar-cost averaging says, I’ve got some money to invest and rather than putting it all in at once, and taking the risk of an immediate decline, I’m going to put it in systematically over time.
While researching into this topic I came across a recent interview in The Baltimore Sun between Jeremy Glaser, Markets Editor at Morningstar and Michael E. Kitces, a partner and the Director of Research for Pinnacle Advisory Group, a private wealth management firm located in Columbia, Maryland. I think it does a neat job of looking at the conundrum investors face and what research of the US market tells us about the odds for each strategy.
If you want to skip to the conclusion, I have posted below a transcript of the final exchange.
Glaser: There could be some situations where Dollar Cost Averaging still makes sense, but you should be aware of the costs.
Kitces: Yeah. But you need to be aware that you are doing it more to manage your regret than anything else and then that’s fine I don’t want to second guess anyone. If your choices are I can go all in if the market crashes I am going to freak out and sell everything when it’s down, or I can dollar-cost average in and sleep better at night. Sleep well at night–you only get one life. So I don’t mean to knock it from that perspective, but just be cognisant that on average over time, it’s really not actually a wealth-creating process. Now if you are investing systematically anyways because you earn X dollars and you are saving a certain amount every month. You will just get the benefit of the math of dollar-cost averaging along the way and it is what it is, because you are just investing the dollars that you have available. But in these scenarios where I’ve got a lump sum and I’m deliberately choosing not to put it all in at once, I’m going stretch it out over time, just be cognisant–it may be great to minimise some of your regret, and it does work from that perspective, but the odds-on bet is you are probably going to end up leaving money on the table.
Scott Phillips is the Head of Distribution of Montgomery Investment Management. To invest with Montgomery domestically and globally, click here to find out more.