Dollar-Cost Averaging is the process of purchasing securities over an extended period of time with the same dollar amount each time. Lump Sum investing on the other hand, involves just putting all your money into the market at once.
For example if you’re wanting to invest $100,000 should you put it all in the market all at once or over a few months? Many people might suggest putting it in over a period of time. However my suggestion is that for most cases, the opposite is actually the wisest move. Let me explain.
If you were to run with the $100,000 example, a simple dollar cost average might look like putting $5,000 in the market for 20 months. The other scenario is just putting the $100,000 in right now.
In most cases putting everything in is a better move because on average, the market goes up most of the time. So if you dollar cost average, you’d, on average, be missing out on the growth by keeping your money out of the market.
In the smaller percentage of times that the market goes down directly following investment, then dollar-cost averaging can make sense. For example if the market has been Bullish for many years with PE ratios climbing, looking at dollar-cost averaging can make sense.
Before I finish, please click here to take a look at a blog page that covers many investment topics. He has a post from early this year that covers this topic concisely: Exploring Dollar Cost Averaging Verses Other Strategies
Thanks, hope you have a great day.
As interest rates have risen considerably over the last year or so, many people have come to wonder if saving now “makes sense”. The characteristic of saving as a give or take isn’t quite right because saving should always be a part of someone’s financial picture. Let me describe the reasons one would want to save and ways in which to go about doing this.
1. Emergency Fund
The emergency fund is one of the universally required parts of any financial plan. Without emergency reserves the risks of anything, whether a personal household or a business operation, increase exponentially.
Savings for an emergency fund need to be accessible at a moments notice. Keep them in either a bank account or money market account.
2. Short-term savings
Short term savings, for things like buying a house are usually best placed in a short-term CD or money market. For example if you know you want to purchase a home in three months or so, getting a three-month CD can make sense.
If the timeframe is less certain, stick with a money market or basic savings account.
3. Long-term savings
For savings intended for expenses that are further out in the future, your best bet is in either a CD, government note, or a combination of more riskier investments. For example if you’re saving up for a car in 3 years, it might make sense to put the whole thing in a CD.
However if you’re able to take a little more risk, you might consider putting 25% in an S&P 500 index, 25% in a short-term government bond index, 25% in a gold bullion ETF and 25% in a money market. These four together over the last forty years haven’t lost money over any 3-year period as long as their rebalanced annually. (However past returns doesn’t guarantee future performance.)
4. Other Savings Goals
Any other goals should be taken in a case-by-case basis. Talk with your financial advisor about any questions you have before making investing decisions that you aren’t sure about.