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.
Staying the Course
Remaining an active investor yields greater returns since on the average, the market always rises. An index of large cap stocks rose 10% per year since 1926, and there have not been any negative 20-year holding periods recorded since then, Johnson said.
Of course, there have been ten-year holding periods that have produced negative returns, such as the years of 1999 through 2008 that included the dotcom bust and the financial crisis resulting in an an average annual return of –1.38%. But that decade was the first negative ten-year holding period since the Great Depression years of 1930 through 1939.
Long-term investors should not forget that the number of positive returns outweighs the down years. In the S&P 500, the benchmark index, there have been 68 positive return years and only 22 negative years since 1926.
“The market advances roughly three out of every four years,” Johnson said. “It would be great if you could figure out which years those down years are, but I haven’t found anyone who can consistently do so. The amount of time in the market is more important than timing the market.”
Buying additional stocks during a dip in the market can net you more gains than merely sticking with dollar cost averaging since this tactic produces “mediocre performance,” said Sreeni Meka, a portfolio manager on Covestor and a managing member of Lakeland Wealth Management in Lakeland, Tenn.
“If you are an individual stock picker, what is the point of buying equities when fundamentals are off?” he said. “If great opportunities are ahead and the economy is coming out of recession, what is the point sticking to cash and investing only average amount?"