When and How Much to Invest With Mark Biller

Show Notes

Those two easy key questions are: “How often should I invest?,” and “How much should I invest?” 

A simple way to make those decisions is to use a “formula” approach that eliminates inconsistency and guesswork.

The best-known formula for answering the how much and how often questions is called “dollar-cost averaging” — or “DCA” for short. The key to dollar cost averaging is simply (1) invest the same amount of money (2) at regular time intervals.

That simple framework is easy to follow and it’s essentially what millions of people do every month via their 401k or other workplace retirement plans. For example, you might choose to invest “$800 a month” or “$400 per pay period.” The important thing is to pick an amount you can stick with faithfully.

And sticking with it faithfully means you have to do this for a long period of time— five years at the very least— so you have time to ride out an extended bear market. 

The beauty of DCA is that it frees you from worrying about whether you’re buying stocks at the “wrong” time. Because your dollar amount remains constant, you’ll get more shares for your money when stock prices fall and fewer shares when prices rise. In effect, you’ll buy more shares at “bargain prices” and fewer at what might be considered high prices. Of course, you won’t know that at the time. It’s only obvious when stocks are “on sale” or overpriced when you look back in hindsight.

With uncertainty surrounding the markets these days, folks often ask us if now is a good time to get out of the market and go to cash or precious metals instead of market-based investing. 

Sound Mind Investing is one of the increasingly rare firms that still takes defensive measures and shifts money to cash when they think the risk of a particularly severe bear market is high enough. They did that early in 2022 and it helped them last year, although now they’ve been lagging in 2023 as the market has bounced back. 

Obviously, they wouldn’t do that if they didn’t think it was worthwhile over the long term.

And that’s doubly true if you’re doing this on your own and have a long time horizon of 10 years or more. It’s just way too hard to get those signals correct.

Experts at SMI have studied this for years and watched it like a hawk all day, every day, and even they don’t always get it right. 

There’s a reason there are millions of retirees and near-retirees with large 401k balances, despite not knowing much of anything about investing. It’s because they invested regularly, every pay period, and let those 401k balances compound year after year, through good markets and bad.

Without a mechanical system like this, most investors only work up the courage to invest after stock prices have risen sharply. Then, when prices plunge, they become fearful and sell after they’re already down. In other words, investor emotions cause them to “buy high and sell low,” which is the exact opposite of what you want to do.

Dollar-cost averaging steers you around those pitfalls, as long as you stick with it and keep following the discipline regardless of what the market is doing at the time.

DCA is not without its imperfections, and the biggest one is that it doesn’t protect you against losses. You will still suffer temporary setbacks from a bear market. 

And that’s largely why this is a LONG-TERM investment strategy. Again, you want a minimum of a 5-year investing time horizon, but preferably, a decade or longer. 

When you’re investing for the long-term, this kind of “set it and forget it” system to accumulate a nest egg is pretty hard to beat. But that calculus changes a bit as a person gets older and has more to lose. And that’s why SMI does some other things in terms of bear market protection.

A second criticism of DCA relates specifically to a person who has a lump sum of money to invest. In that case, the math usually shows that investing it all at once is the best approach, rather than dollar cost averaging it into the market over time.

But there are two things to understand about that situation:

First, most people don’t have a lump sum, they’re investing bit by bit. So this criticism doesn’t even apply to the typical 401k investor.

Second, even though the math says put all of the money in the market right away, emotionally, it’s way easier for people to divide up a lump sum and invest it in pieces over time. If it comes down to dividing a lump sum into pieces and investing one-sixth of that each month over six months vs. being paralyzed by fear and not investing any of it for six months, the dollar cost averaging approach is the hands-down winner!

In the real world, investing smaller amounts over time makes it easier for investors to overcome their fears and continue to put their money at risk even at times of market weakness. That said, it’s good to know that the research shows it’s better to get the money invested sooner, so you can work toward doing it as quickly as possible.

DCA is simply systematically investing a fixed amount of money regularly, and because of that, it has these benefits:

It eliminates the “Is this a good time to buy?” question. If you’re dollar-cost averaging, every month is a good time to invest!

It imposes a discipline — a “forced saving” structure that you can think of as making “installment payments” on your future financial security.

Dollar-cost-averaging helps you to buy more fund shares when prices are low and fewer when prices are high, so your average price over time is likely to be lower than other methods of buying.

Finally, it “automates” your investing, which helps eliminate the chance that you’ll forget to invest, or worse, be scared out of investing by current events and news.

DCA is tailor-made for 401ks, 403bs or IRAs. In all three cases, you can automate your contributions and really should do that to make this work most effectively.

Bottom line, it’s a great illustration of Proverbs 21:5, “Steady plodding brings prosperity”.

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