Panicked investors who were prompted by fears and participated in the mammoth stock sell-off should get back into the market immediately, because a lengthy hiatus often results in missing out on gains.
Investors who lost their nerve this week should not wait to get return to the market since some individuals will wind up sitting on the sidelines for too long. Investing in the market straightaway prevents investors from taking part of “another form of market timing,” said Edison Byzyka, vice president of investments for Hefty Wealth Partners in Auburn, Ind.
Dollar Cost Averaging Works
Making periodic investments, known as dollar cost averaging, allows for a “systematic and objective” approach to investing, since timing the market is not “achievable,” Byzyka said. “If we begin to accept that notion, then we must be able to accept the fact that we need to participate in all market cycles, positive or negative, because we simply do not know which one is coming up next.”
An investing strategy based on emotions never succeeds since your feelings will “always betray you” and is a fool’s errand, said Matthew Tuttle, portfolio manager of the Tuttle Tactical Management U.S. Core ETF in Stamford, Conn.
If the stock market has a down day, followers of this strategy then believe the following day will also experience losses, he said. On the contrary, these investors also believe that if the market is in the green, the next day’s performance will produce the same positive results.
“In actuality, there is a better chance of an up day being followed by a down day and vice versa,” he said. “If you are currently out of the market or currently in, you need to adopt a tactical methodology with clear rules on when you get out and in and then follow the system.”
Dollar cost averaging remains the best method to accumulate wealth over the long haul and individuals should “invest early and often,” said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa.
Selling stocks sounds like a simple decision, but there are caveats, since investors also have to determine when to return to the market. What often happens is that many people only get one of those decisions right and get the other one wrong and end up losing money, he said.
Investors who adhere to the dollar cost averaging strategy can use their money over time to purchase equities at “lower prices if the market does decline for a long period of time,” said Yale Bock, a portfolio manager on Covestor, the online investing marketplace, and president of Y H & C Investments in Las Vegas.
Pursuing an alternative method relies on using all of your capital at one time and having to be accurate about trying to time both the price and market, “which is literally impossible,” he said.
The next step is determining what increments your dollar cost average strategy will follow, depending on your outlook and approach.
“I believe the next six months to a year will be a difficult period of time in energy, so allocating capital at the end of every month to buy the stocks of energy companies we want to own is our approach," Bock said.