“There is really no way to know what the market is going to do in the future, so why not put money aside while you have it available,” said Patrick Morris, CEO of New York-based HAGIN Investment Management. “I would not be bullish on bonds here, though. Perhaps the good old Vanguard passive index fund for the S&P 500 is the way to go.”
Dollar-cost averaging can result in “mediocre performance,” said Sreeni Meka, a portfolio manager with Covestor, an online investing marketplace, and 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 an average amount?”
Benefits of Dollar-Cost Averaging
Investing the money immediately does have its pitfalls, because the markets could be extremely volatile like the past two weeks and continue in a downward trend right after you purchase stocks. Investors who are motivated by regret aversion can “hedge their bets by spreading that investment out over time,” Johnson said. “By spreading the investment out over time, you lessen the risk that you committed all of your funds at or near a market high.”
The volatility of the stock market can not only be “confusing”, but also intimidating for many people, so sticking to dollar-cost averaging is important, said Grant Easterbrook, co-founder of Dream Forward Financial, a low cost 401(k) plan based in N.Y.
“Reinforcing the value of putting your bonus towards saving for retirement - rather than spending it is important,” he said. “However, we don't necessarily agree with the strategy of trying to entice people to save their bonus by discrediting dollar-cost averaging."
Instead, investors should focus on the value of compounding interest and the long-term nature of retirement investing where short-term stock market fluctuations do not matter, Easterbrook said.