Slow and Steady Wins the Race

For an investor, this famous proverb can be broken down into three parts:

1. Slow – be a long-term investor, and
2. Steady – be disciplined and stick with your investment plan through varying market cycles
3. Wins the Race – achieve your financial goals and objectives.

Simple math, right? 1+2=3. Unfortunately, it is not that simple when it comes to investing. Every investor is different and has unique personal traits that may make this equation much more difficult than at a first grade level. Fortunately, there are tools at your disposal that can make this not-so-simple math equation easier to add up. Dollar cost averaging is the investment strategy that epitomizes this proverb and one of the single best investment approaches that an investor can use to achieve their long-term financial goals and help maintain composure during periods of market volatility and drawdowns, as we have experienced recently. The latter may turn out to be the most valuable benefit of dollar cost averaging, even though it may also be the most difficult to stomach for some investors.

Dollar cost averaging has two common definitions:

1. Systematically investing a portion of recurring cash in-flows such as a bi-weekly paycheck on an ongoing basis (i.e., buying assets in your taxable account every month or 401(k) account every pay period), and
2. Investing a lump sum of cash systematically over a period of time.

The hope with either of these methods is to manage price risk when purchasing assets and not buy in at any single price point. This technique ensures an investor buys fewer shares when prices are higher and more shares when prices are lower. But there are more benefits to the strategy that are worth exploring. We will focus on benefits relative to the first definition as it is applicable to a majority of investors and has been used as an important investment strategy to build long-term wealth for countless individuals.

Disciplined Saving

When it comes to growing wealth, a mindset for saving can be an asset. Contributing money to an investment account regularly allows for the practice of disciplined saving. This strategy allows investors to stay invested and participate in the historical upward trajectory of the market over time. A byproduct is setting good behavioral practices in place by making contributions routine and on auto-pilot without much needed effort from the investor. Many employer-sponsored retirement plans and investment platforms have given investors the ability to program and automate their contributions so they may need to do little further to have their dollars from a paycheck or bank account invested on their behalf on a regular basis. This is not the same as completely ignoring your portfolio after this has been put in place. You should still periodically review your portfolio for rebalancing opportunities and ensure the portfolio still aligns with your goals and objectives.

Avoid Market Timing

There may be the temptation to build up cash as it is received, and attempt to “time the market” by investing a lump sum at just the right time. This is a game that many investors will not win, and few, if any, can win consistently. Nothing can hurt a portfolio, or an investor’s psyche, more than investing a lump sum of money at the top of a bull market only to see the portfolio’s value drop as asset prices decline during a market decline. This a risky proposition that most investors would prefer not play. You would be better off lowering your risk of buying into the market at the wrong time by buying in at several times over the course of your investing time horizon as cash is received.

Tax-Loss Harvesting Opportunities

Purchasing assets in regular intervals over the course of time establishes different tax lots and gives an investor the ability to harvest tax losses during periods of market volatility. Holding assets with different cost basis (price you pay for the asset) gives the investor the flexibility to sell assets that are currently priced below cost to generate tax losses that can be used to offset tax gains generated in the portfolio, or up to $3,000 of ordinary income. This may be especially important when an investor has a significant capital gain from the sale of an asset or needing to sell assets in the portfolio for a large cash distribution.

Reduce Emotional Short-Term Investing

It is impossible to remove all the emotion from investing. An investor inherently is taking on risk by purchasing growth-oriented assets like a portfolio of diversified equities that appreciate over time. It is inevitable that some, if not all, of those assets will occasionally lose some of their value during certain periods, and in turn emotions may begin to influence the investor. This can lead to suboptimal decisions, such as selling at market bottoms in an effort to “avoid more losses.” Dollar cost averaging, by nature, is consistent investment decisions that are not driven by emotions. A disciplined buying strategy focuses an investor’s energy towards achieving their goals and objectives eliminating hype created by media and news outlets on the short-term direction and performance of the stock market. Staying the course during periods of short-term volatility often leads to long-term investment success. In short, if the headlines in your life (e.g., marriage, job loss, change in health, birth of a child, etc.) do not change, the headlines in the newspaper generally should not change your long-term investment strategy.

The only thing certain in the financial markets is the uncertainty of the markets themselves. No one can predict with 100% certainty when the next market high or low will take place. The investor’s best defense is a well-thought-out wealth management plan addressing their goals, liquidity needs, time horizon, tax situation, risk tolerance and unique circumstances, in tandem with an appropriate asset allocation and diversified portfolio. Dollar cost averaging may be an effective strategy to support the attainment of long-term financial goals and avoid emotional short-term thinking. Please reach out to a member of your client centric team and let us continue to serve you in winning your race.