Friday, 14 October 2016 11:34

Q: With the presidential election approaching, is now a good time to be invested? A: Market timing doesn’t work over the long term so consider dollar-cost averaging.

By Jesse C. Koepp, CTFA | Families Today
The writer is a Senior Client Relationship Manager at Fenimore Asset Management headquartered in Cobleskill, NY with a branch office in Albany. Recently, I have heard concerns about matters such as the presidential election and possible rising interest rates, and some have asked if it is a good time to be invested. I would like to highlight a study that came out earlier this year. DALBAR, a financial research firm that studies investor behavior, reported that during the past 20 years ending 12/31/15, an investment in the S&P 500 Index would have gained 8.19 percent annually. However, the average stock mutual fund shareholder gained only 4.67 percent during that same time — primarily due to ill-fated attempts to time the market. An overwhelming amount of research shows that long-term investing — even through a stock market downturn — yields better results over the years than trying to time a decline, remove capital, and return when “things are better.” More than 100 years of stock market history reinforces the fact that rallies occur when investors least expect them. If you do not need the money and have investments aligned with your long-term financial goals, then data suggests that it is preferable to stay invested. Additionally, instead of letting emotions affect your decisions, there is a rational investment method you may want to consider that many find agreeable — dollar-cost averaging (DCA). DCA takes the guesswork out of investing. If you contribute methodically through a payroll deduction into your 401(k) or 403(b)(7), you are already implementing this practice. DCA is a long-term strategy that involves investing a fixed-dollar amount into a mutual fund account (for example) at regular intervals. Since you always invest the same amount, you will purchase more shares when the price is low and fewer shares when the price is high. DCA’s premise is that your average cost per share may be less than your average price per share, thus reducing your investment risk over an extended period of time. Instead of investing a lump sum, the idea is to average out the highs and lows to help you avoid trying to determine the right time to invest. It allows for smaller investments that, when done consistently over time, can grow into a considerable savings. It takes advantage of the cyclical nature of the market and allows you to focus on long-term growth and ignore short-term market conditions. While this technique does not eliminate the possibility of losing money on an investment, losses may be lowered during periods of declining share prices and profits may be enhanced when prices rise over time. When you need the money, DCA is also an efficient way to withdraw funds. The advantages are similar to when you were investing because money is withdrawn automatically regardless of share prices — you do not have to concern yourself with fluctuations. Despite today’s headlines, please remember that trying to time the market simply does not work over the long haul. It is important to remain patient and calm when attempting to grow your assets — and dollar-cost averaging can help. Dollar-cost averaging is a plan of continuous investment in securities regardless of their inconsistent prices. Of course, you must consider your financial ability to continually purchase shares. As with all investment methods, there is no performance guarantee.
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