When it comes to investing for the long haul, you will often see the financial media recommending any one of many preferred techniques (especially when it comes to investing lump sums, such as an inheritance or a retirement account rollover). But which method is best?
One commonly recommended method is dollar-cost averaging, which involves putting money into the market a little at a time. The thinking is by investing money a little at a time, you will invest some of it at lower prices and some of it at higher prices. This will theoretically average out the risk over time. So, for example, if you have $100,000 to invest, you would move $8,333 each month ($100,000 divided by 12) from a savings account to a portfolio of stocks and bonds.
Another strategy is to decide on an allocation of stocks and bonds that will help you meet your financial goals, then invest the whole sum based on that allocation. For example, you might invest 60% of your $100,000 in stocks and 40% in bonds. This will allow you to reach your target allocation quicker (because some of the money is not sitting in your savings account for a year).
A third option: combine approaches. No one knows what stock or bond prices will do in the future, especially in the short term. So you might change the period over which you gradually invest. Perhaps you might do it over three or nine months.
Which of these approaches works best? It depends on your individual goals, time horizon, and tolerance for risk. And a perhaps more important point is that when investing for the long haul, it is important to have an allocation that allows you to ride out the market’s ups and downs.
Please reach out to me if you would like help understanding these options for investing.