The investing world has its own unique lexicon, filled with aphorisms as ubiquitous as the financial advisers who promote them at seminars. Though often clichéd, these sayings are rooted in wisdom and merit contemplation. Perhaps one of the most memorable—and relevant to our discussion—is the mantra of buy-and-hold strategists: "It's time in the market, not timing the market, that matters."
You've likely heard this financial adage and may even agree with its sensible advice. Whether right or wrong, it serves as a support for pragmatic investors and is often cited in discussions. With that in mind, I will invoke it once more—but for a different reason.
One of our quarterly strategies brings this saying into a different context by offering an alternative interpretation. It's very simple and has likely been part of your investing playbook—it's called Dollar Cost Averaging (DCA). And it's a fantastic way to engage in long-term investing.
For those unfamiliar with Dollar Cost Averaging, let's revisit our earlier slogan: "It's time in the market, not timing the market, that matters." DCA embodies this principle by systematically investing (or liquidating) equal amounts of money into securities over a defined period. Let me clarify with an example:
Jill has $1,000,000 of investable cash and wishes to deploy her nest egg into a growth portfolio. However, she has reservations about market stability and is nervous about investing all her assets at once, fearing an immediate market downturn. Her investment adviser agrees and proposes a DCA strategy.
Jill's adviser selects a growth model appropriate for her needs. Together, they review the securities and assess the associated risks. The adviser then proposes investing $100,000 per month over the next 10 months.
In this way, the adviser takes advantage of market volatility while reducing the impact of any single market event on Jill's total investment. Each monthly investment purchases securities within the model. Some purchases may occur during market pullbacks, while others may happen during market expansions. Ultimately, the adviser has alleviated Jill's concerns and established a cost basis that approximates the average market prices over the ten-month period.
Moreover, Jill can execute the same DCA strategy when exiting the portfolio, opting for gradual liquidation instead of a complete and immediate sell-off.
It's a simple and sensible approach to investing in equity or bond markets over time and should be considered an option for the risk-averse investor.