How to Buy into Any Market

Jul 7, 2022

Do you have cash and are thinking of investing? That’s smart. The desire of wanting to put your cash to work (rather than having it sitting in a savings account, losing value due to inflation) is the right idea. And the best part is that you’re in control of getting started.

There are two common approaches for taking idle cash and investing in the market: dollar-cost averaging and lump-sum investing. Each has a role for getting started - let’s understand the difference, what to consider when choosing either tactic, and why now is the time to start investing.

The Difference Between Dollar-Cost Averaging and Lump-Sum Investing

So, what’s the difference between the two? For this scenario, consider you have an extra $10,000 that you’re willing to invest.

The idea behind dollar-cost averaging is to invest predetermined amounts over a period of time (e.g., $1,000 each month for 10 months). Dive more into dollar-cost averaging here. Conversely, lump-sum investing is investing the total amount at one time (i.e., all $10,000 at once).

When looking at historical returns, a lump-sum investing strategy typically outperforms a dollar-cost averaging strategy, over the long run, because broad financial markets generate positive value over time. But because lump-sum investing is the financial equivalent of jumping straight into the deep end, many investors view it as having more risk.

For those with less risk tolerance, dollar-cost averaging may better suit your needs, and it even has a psychological benefit. This strategy avoids you trying to get it ‘right’ and entering the market at a specific point, to instead, simply focusing on the long-term benefits of investing. Consider this as a hedging strategy against big losses. A dollar-cost averaging example is a 401(k) plan. You’re contributing a scheduled amount over time and therefore removing the timing element out of the equation.

Now that we understand the differences between the strategies, let’s outline other elements to consider when choosing which tactic makes sense for you.

3 Factors to Consider When Choosing

While you can control your choice of method, unfortunately, the market and its performance are entirely outside of your control—and any experienced investor will agree that timing the market is close to impossible. While that shouldn’t deter you from investing, it should help set expectations and encourage you to start on your own terms. Here are three aspects to determine the ideal investing approach for you.

  1. Your long-term financial goals. Establishing your long-term financial goals is an instrumental first step as it will help identify the type of investment strategies needed to accomplish them. You’ll know how realistic your goals are compared to today’s habits, how aggressive and disciplined you’ll need to be, or unutilized areas that you can take advantage of to help get you on track. Check out ‘The Guide to Getting Started on Financial Wellness’ as a resource.
  2. Your risk tolerance. This is the level of risk you, as an investor, are willing to take. In other words, how much of a decline in the value of your investments are you comfortable with? This will help determine the type of investments you’ll choose – either low-risk and lower returns, or high-risk with the potential for higher returns. Your goals feed into this by default as your strategy depends on your objectives (are you seeking to grow your wealth or begin living off returns?) and time horizon (when are you seeking to use the returns?). Consider consulting with a financial advisor when determining your risk tolerance as they are unbiased resources who can help balance the right amount of risk for you.
  3. Costs and fees for each. With investing comes at least some degree of cost. When evaluating a dollar-cost averaging approach, it may help to consider the fees and if they will erode any potential benefits of the tactic if they are substantial.

These three factors will help get you in the investing mindset by establishing your financial foundation and preferences. Investing is all about using the wealth you have, putting it to work, and harnessing the power of compounding and time to grow your wealth – but it’s still just one piece to your money management puzzle. The rest is all about you, your goals, behaviors, and eagerness to act on opportunity. Take the time to prep and evaluate your personal investing terms now to minimize headaches down the road.

Why Now is the Right Time to Invest

If you talk to a financial professional, there’s a good chance they will share the quote: “Time in the market always beats timing the market.” It’s the caveat that we never know if tomorrow will bring higher or lower prices. Yet, the longer you wait, the more growth you miss out on. The numbers speak for themselves, see an illustration of ‘The Power of Saving’.

Don’t miss out on another day. Use this as your guide to selecting your investing approach to getting started in the way that makes sense for you and your goals today. If at any point you have a question, don’t hesitate to reach out as our team of financial consultants and advisors are available to help.

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The information in this paper is not intended as legal or tax advice. Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation.

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