Question: I’m 35 years old, and I have about $80,000 to invest. Should I put in all of the money at once or use dollar cost averaging to get the average of the market highs and lows?
Ric: Money that you wish to invest for the long term should be invested all at once as a lump sum. That’s because historically the markets tend to rise, meaning the sooner you invest the better off you are.
But you’re concerned that if you invest today the market will crash tomorrow. So to reduce that risk, don’t invest all your money in one asset class. Diversification is the key: Put some of the money in small-cap, mid-cap and large-cap stocks, some into foreign stocks, some into bonds, some into real estate, some into commodities, and so on. The goal is to build a globally diversified portfolio, giving you downside protection against a market drop. Even if one or more asset classes were to suddenly decline in value tomorrow, it’s not likely that all of them would.
Dollar cost averaging, on the other hand, is designed for a different purpose. DCA is investing a specific amount at specific intervals — in your case perhaps $8,000 a month over 10 months to get your full $80,000 invested. DCA would indeed give you the average price of the 10-month period, but that’s not the point. After all, wouldn’t you rather have the 24-month average? Or the 5-year average?
Over what period will you decide to DCA your 80 grand? And keep in mind the downside: In month one, you’ve invested only 10% of your money; the other 90% is still sitting in cash. The low return of that 90% could undermine the benefit of investing the 10%.
Dollar cost averaging is designed to invest money as you receive it. For example, you invest $100 from your paycheck this week, and in two weeks, when you get another paycheck, you invest another $100. It’s a good way to invest smaller amounts as you accumulate them. If you don’t know how to invest the entire $80,000 in a highly diversified manner, just give us a call and we’ll be glad to help you.