NEW YORK (
) -- One of the most common questions I get: Should I wait until the market goes up before I make another contribution to my investment account?
The answer is no. You should be investing continuously, in fair weather and foul. Ongoing contributions to your 401(k), individual retirement account or other investment vehicle give you the best results over time.
Since April, the market has generally headed up, following a two-month slump. Given the unending turmoil in Europe, slowing growth in China, high unemployment in the U.S. and other troubles, it likely will slip again before too long.
No one, other than the very lucky, can time the market successfully. Trying to invest that way ignores a truth about markets: They go up, and they go down.
In the grand scheme of things -- and some research that bears this out -- investing when you have the money provides a greater return historically than waiting until the market is up. So don't delay.
No matter how many times you hear the thought, the truth of it shines through: Past returns are irrelevant, as they don't guarantee future results.
Buying low sounds good, but feels scary
, because that's the moment the news is the most worrisome. Indeed, at times panic fills the air.
It feels as if there is less risk when things are going up. But
that is when the risk is rising.
The value of your most recent investment is more likely to go down after a prolonged uptrend. But investments made over the long term are likely to grow, despite periodic downdrafts. See my blog post
for more on this topic.
History shows that the stock market rises over time. True, for shorter periods, under 10 to 15 years, the trend may be negative. But that tends to even out. As long as the U.S. economy expands, as it has through most of the nation's existence, so does the stock market.
Back to investing when you have the money. Most people don't have the money until they are paid, and thus regular monthly contributions of the same amount (called dollar cost averaging) are common.
Sometimes, people receive inheritances or bonuses. Or they find that savings earmarked for a specific purpose are no longer needed for it. Perhaps it's a reserve fund for a new business that now is doing well. Do you invest it as a lump sum?
You split it into multiple investments if you are nervous or certain the market will go down. But what if markets go up? Then a lump sum is better (because now is the "buy low" time). Do you understand the problem yet? Nobody knows which way the market might go tomorrow, or at any other time in the future. A long-term perspective suggests investing it as a lump sum. The real question you are struggling with here is how to allocate it, not whether you should invest all at once or in increments.
The best frame of mind when making investment contributions is to expect the value to go down sometime, indeed many times, between when you contribute and when you withdraw. Timing contributions or withdrawals based simply on what the market has just done is likely to lead to an overall loss. Investing high and selling low will lose you money, by definition.
You are likely to experience both bull and bear markets many times during your lifetime. Allocate your portfolio so your highs and lows don't swing so wildly, using asset classes that have less volatility relative to others.
--By Larry R Frank Sr., CFP, registered investment adviser in Roseville, Calif., for
. Frank is the author of the book, Wealth Odyssey. He has an MBA with a finance concentration and B.S. cum laude in physics with which he views the world of money dynamically. He has peer-reviewed research published in the Journal of Financial Planning.
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