Dollar-Cost Averaging

Updated on

I got a call from my former assistant a few weeks ago. After being a subscriber to one of my letters for a year, she’s started saving real money in her 401(k) and wanted to know what to invest in.


It’s the hardest question in the world to answer. Impossible.

But let me try.

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

The Worst Time to Begin as an Investor

Now is actually the worst time to begin your investing career.

That’s because stocks and bonds are overvalued, and most people are constrained to investing in stocks and bonds. (I wrote about this dilemma in my free report, Investing in the Age of the Everything Bubble)

For sure, there are pockets of value here and there—and that’s what I try to focus on in my letters. But certainly there’s nothing that’s going to be an option in a 401(k) plan.

Here is the sad reality: your starting point matters.

Say you’ve cobbled together $10,000 to invest. If you invested it all in the summer of 2007, you are very unhappy. If you were lucky enough to have a starting point of March 2009, you are extremely happy. Actually, we can quantify it.

We ran some numbers here and if by pure chance you began your investing career in the summer of 2007, and put it all in the S&P 500, you’ve annualized at about 6%.

If by pure chance you began your investing career at the lows in 2009, you have annualized…16.5%. That is a massive difference, entirely due to luck.

So what is the answer?

What do you tell someone who is chomping at the bit, ready to deploy that cash?  Wait for two years?  What if the market is higher in two years?

It is really, really hard.

Dollar-Cost Averaging

You can’t tell people to wait, because the future is unknowable. What you can tell them is not to plop it in the market all at once.

In the old days (like the 90s), the wisdom was that you should dollar-cost average into your investments. You should send a $300 check every month, whether the market was up or down.

Timing the market is something that should only be attempted by a handful of people, so instead of timing it, make continuous contributions.

In practice, it can be hard to do, because people get excited by higher prices and contribute more, and demoralized by lower prices and contribute less.

The same applies here. If a novice investor had a $10,000 nest egg to start with, my advice would be to piece it out $1,000 at a time for ten months. This would reduce the risk of dumping it all in at the highs.

There is a lot to be learned here. Even if you are a tactical investor like myself, there is a lot of risk around entry and exit points. As I’ve gotten older, I’ve learned to average into trades and average out of them.

After all, it’s not like I’m sitting on a trading floor anymore. I have no particular edge in finding the precise point to enter a trade.

Finding Undervalued Gems

But what if valuations are objectively high?  Buying expensive stocks isn’t always a bad idea, but it’s a lower expected value trade.

Well, one way around this is to focus on stocks that are cheap. Lucky for us, there is a factor for this: value stocks.

In 2017, growth stocks massively outperformed value stocks, so investing in value would be a kind of hedge against a market downturn. Of course, even value stocks are overvalued by historical standards. But it’s a good option in the spirit of doing less harm.

You can also find sectors that are overvalued, but you’re taking on a lot more idiosyncratic risk.

You can also diversify into other asset classes.

Like bonds, but be specific about which types of bonds.

One thing that people like myself are paying close attention to is the fact that commodities (hard assets) are more undervalued relative to financial assets than at any point in recent history.

Commodity investing is fraught with all kinds of risks, but investing in companies that produce commodities is relatively straightforward.

ETFs are an easy and cheap way to get exposure to any asset class or sector you want. But you have to be careful as not all ETFs are created equally. Start by learning the basics—there’s plenty of available information on the web.

If you don’t know where to start, you can also download my free special report about the fundamentals of ETF investing, The 5 ETF Trading Strategies You Should Know About Before Investing.

Better Than Nothing

The trouble with beginning your investing career when everything is expensive is that you are a novice, and you’re not yet sophisticated enough or creative enough to figure out workarounds. So most people are just going to have to take it on the chin.

The good news is that if you were the unluckiest person in the world, and you put it all in play at the top in ’07, you still made 6% over the last 10 years, which is better than a kick in the pants!

Grab Jared Dillian’s Exclusive Special Report, Investing in the Age of the Everything Bubble

As a Wall Street veteran and former Lehman Brothers head of ETF trading, Jared Dillian has traded through two bear markets.

Now, he’s staking his reputation on a call that a downturn is coming. And soon.

In this special report, you will learn how to properly position your portfolio for the coming bloodbath. Claim your FREE copy now.

Leave a Comment