Market’s down… now what?!
Obligatory disclaimer: I’m no financial advisor, the views portrayed here are my own and do not reflect any investment or financial advice. Please consult with your financial advisor when investing.
I guarantee you this is not the last time we are going to see the market go down. The market fluctuates — it goes up and down — and that is why its very hard to predict where is it going to next.
People ask me what to do. “Should I buy?”, “Should I sell?” As I mentioned in my last article, I love to sleep, and more so peacefully. That is why I employ a simple strategy:
Dollar Cost Average or DCA.
DCA is just a fancy term for averaging the price at which you buy a stock over a period of time. With DCA, you minimize the risk by continuously buying a particular stock and averaging your cost.
Let’s look at an example
I buy one stock of x at $100, making my total cost $100.
Next month, the price of the same stock is now worth $200, and I buy one more stock.
Now, my average cost for the two stocks I own is $150 ((100 + 200)/2). I’ve effectively averaged the price I paid for the stocks. I didn’t pay $100 nor I paid $200, I paid $150. If you think about it, this minimized my risk (but also, lost on some potential gains).
You might argue this is not good. I could have bought two stocks at $100 and my cost would’ve been $100 rather than $150. And yes! That is true! If I knew the stock was going to double its price in a month, then for sure I would’ve put a lot of money the first time!
I could have made the same counter-argument. What if instead of the stock price doubling, the price was now $50? This would mean I bought two stocks at 100$, therefore a greater loss than if I had bought one at $100 and one at $50. Now you would be thanking me you did DCA huh? ;)
If I’ve learned something is that no one has a crystal ball, and no one can predict the stock market. Because of this reason, I don’t mull over when the right time to buy a stock is, but rather buy often and average the price.
There’s several ways to adopt DCA, I’ll describe two.
- Monthly contributions. This is what I normally do. Remember, the amount you contribute does not matter. The important factor here is time and consistency.
- One time gross contribution. Let’s say you have some cash sitting around and been wanting to invest it. Rather than investing the full amount in one go, you could invest it in the span of 9 months. Invest 1/3 today, 1/3 in 3 months, 1/3 in 9 months. Or whatever cadence you are comfortable with. The point is to space out the investment to average the price.
DCA removes emotion and irrationality out of the investing equation. Rather than wasting time figuring out when to buy and possibly regretting a specific moment, DCA allows you to invest consistently, getting an average price throughout the lifetime of your investing journey.
BONUS: Kevin, I’m ready, what should I buy? Refer to my previous article! The suggestion will be the same no matter the time. Pick a well-diversified index fund and start! From my side, I’ll continue investing in the S&P500.
Remember, in the end it’s all about YOUR risk tolerance. This is what has worked for ME and allowed me to sleep peacefully. If you are unsure how to start investing, DCA might be a great start!
