When is the best time to invest? What is the best way to invest? These are the two most common questions I have received from clients in the past and readers now. My answers are always the same, best time to invest was yesterday, but today is the next second best opportunity. The best time to invest is as early as possible so that one can enjoy the power of compounding. The answer to the second question is generally a little more complicated; however the best strategy I find is Dollar Cost Averaging.
Dollar Cost Average (DCA)
Dollar Cost Averaging is a simple investing strategy; you basically invest a set amount of your income on regular intervals. Often this is employed when people opt in for an employer sponsored retirement savings programs where the employer deducts a set amount per paycheck and invest that for your retirement. The amount in DCA is whatever amount you feel comfortable with and is set for regular intervals, often bi-weekly but could also be monthly or even weekly.
Why Dollar Cost Average?
The reason I prefer Dollar Cost Averaging as an investing strategy is simple, it takes away all the guesswork and market timing. With DCA you will be investing fresh money without trying to time the market, the unique benefit of DCA is that you will be buying at different times in the market. Sometimes you will be just before a correction while other times you will buy right at the bottom; this can dramatically enhance your returns. Since you will be purchasing at different times in the market your portfolio will have less fluctuation and hence you can sleep better at night.
DCA works great 90% of the time, the problem arises when investors deviate from the plan in bad market conditions. When the market looses 10% over a trading session and investors panic and stop their DCA plans, they will loose out and all the gains after the decline and will only have purchased at the market peak, hence diminishing their portfolio returns. The trick with DCA is to stick with it through the good times and the bad.
Dollar Cost Average vs. Lump sum investment
This brings up the debate between DCA vs. Lump sum and which is a better choice? Either strategy will work depending on your goals, each have their benefits and drawbacks. Personally as a small investor I prefer DCA because I do not need to worry about market conditions and can sleep better at night.
DCA Results
See Canadian Capitalist for review DCA for the TSX Composite.
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“Dollar Cost Averaging is a simple investing strategy; you basically invest a set amount of your income on regular intervals.”
No, that’s saving regularly as you get paid. DCA would be taking whatever amount you have available for saving and buying shares over a period of time rather than all at once. Unless your pay cheque is invested over a period of time, you’re confusing regular saving (something very good) with dollar cost averaging (something good only if the market goes down while you invest then back up over time). But if you’re like everyone else, the amount deducted from your pay is spent immediately in the allocation you assigned when you signed up for your pension or group RRSP.
I agree with your original stance, the best time to invest is yesterday. The next best time is today. DCA only beats investing today if the market goes down tomorrow and up the next day. The general trend for the stock market is up, or we wouldn’t invest in it. Therefore, logically, the earlier the better for investing.
Do you think that someone with a lot of credit card debt should still invest yesterday? Compounding works both ways.
I think DCA is a good investment strategy. It keeps your investing automatic and it helps keeps a middle ground through the markets highs and lows. I’m with you…DCA keeps it simple and discourages trying to time the market which seldom works anyhow.
DCA has been a very effective tool in the last few years. Too many quit adding money when the market is down. That is foolish.
>>DCA works great 90% of the time, the problem arises when investors deviate from the plan in bad market conditions.
I’m wondering if you have supportive evidence for this. The primary literature I’ve read suggests that DCA is not as effective as lump sum investing in rising markets. So in any bull market run, you are better off investing all your money up front.
DCA certainly simplifies things, and keeps people investing during market downturns – but even then, I know many ardent DCA investors who stopped during the last crash when this strategy would have been most effective.
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