You may be asking…what is DCA? DCA is an acronym used in investing for Dollar-Cost Averaging. Dollar-cost averaging is a program for investing set amounts of money over specific periods of time.
DCA programs have their benefits:
- If you don’t have a lump sum, a discipline approach to invest every week, month or quarter helps you to accumulate investments little by little;
- It removes the emotion of the decision on when to invest;
- It may prove that you purchased your investments for a lower average cost than if you were to invest it all at once. If the market moved in a zig-zag direction when you were investing, you may buy some shares lower and higher than today.
If you’re averaging into the market as you get paid, then you’re simply investing money as you get it. There’s no better alternative to that. You can’t invest money that you don’t have yet.
But if you have a lump sum of money, should you DCA? The overall trend of the market is that it goes up over time. So if in 5, 10, or 20 years from now, the market will be vastly higher than it is today, did it matter if you averaged your money in over time? We argue that it does not matter. What would matter, is if the market continues to rise, while you sit in cash and buy at higher prices than what you could have bought the investment for today. For some research, read Why Dollar-Cost Averaging Stinks.
Investors often give us funny looks when we tell them to put their money to work all at once. We are immediately met with retorts, like, ‘the market has run up so much, shouldn’t we wait for a pullback’? Or, ‘why are you telling me to invest at the top’? The simple answer is that the market will be higher in the future. Just because we are at all-time highs in the market, doesn’t mean prices won’t continue their march higher.
Now this may come as a bit confusing…because just last month, we specifically wrote about a looming market correction. We wrote as follows: ‘A correction is coming…! How can we be so sure of this? Because stock market corrections occur regularly each year.’ We absolutely still believe a market correction is bound to occur. But between now and then, the market could be up another 5%, 10% or 20% from where it stands today.
The moral of the story: Don’t sit on the sidelines waiting for a correction to come. If you have money that you want to invest for the long term, put it to work today. If you listen to this advice, you may very well be cursing us in 2 months…but we’re positive you will be thankful in 20 years.