A reader asks:
Ben, I have been in cash since late Feb. What are your thoughts on dollar-cost averaging back in vs. just getting back in all at once?
The stock market has the rare ability to make everyone feel terrible all at the same time.
If you stayed invested you feel terrible about the fact that you just sat through the fastest 30% bear market in history.
If you went to cash at an opportune time you feel terrible about the fact that stocks didn’t go lower and you just sat through one of the fastest 30% rises in history.
If you were like this reader and went to cash before all of this happened you’re still ahead of the game. The S&P 500 is still 15% off all-time highs. Other areas of the market are down even more.
Lucky or good, sitting in cash is still not a horrible position to be in but it does present its own set of challenges.
I could run the numbers on the dollar cost average versus lump-sum decision in a down market based on stock market history1 but this is one of those times where the numbers probably don’t matter.
Feelings almost always trump data when dealing with money but this relationship is amplified even more than usual during a crisis.
This decision is more psychological than spreadsheet in nature.
With no easy answers about how to proceed, here are some options for those holding cash waiting to deploy:
Just do it. Ripping off the bandaid and putting it all to work immediately is probably your best bet based on historical data because the stock market tends to go up most of the time.
But this option invites the biggest chance for regret (I’m assuming we’re talking about being all-in or all-out here and not in a more diversified portfolio which is a different conversation).
Every investor assumes stocks will fall out of bed immediately following their lump-sum purchase like the market is out to get them.
Most investors will feel far worse about seeing stocks fall after investing a lump sum than they will feel good about seeing them rise.
Pick a catalyst. This option is the one where you’re hoping to get in at a better entry point. You could buy when stocks are down 10% or 20% or 30% or whatever your loss threshold happens to be.
The biggest problem for this plan is sometimes stocks don’t cooperate and get away from you before hitting those targets. This strategy also invites more prediction into the process.
So this strategy requires some sort of out or contingency plan if and when your triggers aren’t hit.
Average in on a set schedule. Investing a set amount or percentage of your cash on a regular schedule is the simplest way to minimize regret and diversify across time.
How you break it up depends on how patient or impatient you may be to get back in.
This could be 20% buckets spread out over 5 weeks. Or 10% bucket over 10 weeks. Or maybe a 25% slug once a month over 4 months?
The amount or breakdown doesn’t matter as much as your ability to set a plan and then follow through with that plan.
Stretch it out. The average bear market since the 1920s has lasted roughly a year from peak-to-trough. And the breakeven has been roughly another 2 years or so.
Nothing says the current iteration has to exist on the average timeline but for those who think this may take some time to play out, you could average in over a longer time horizon than is typical. Maybe that means putting money to work over 6 months or a year or 18 months?
The downside here is if things happen quicker than expected and the market forces your hand.
Mix it up. Each of these strategies for getting invested has drawbacks, leaving plenty of opportunity for regret. So maybe you mix things up and use some of each strategy?
You could average in with some of your money, put some to work now, set some aside for bigger potential loss points, and keep some dry powder for a longer time frame.
A more diversified approach means you’ll be happy with some of your purchases, regret others, and miss out on some opportunities elsewhere.
This is the type of decision that invites regret no matter what you do. I love the idea of splitting up your decisions because it gives you the opportunity to always be a little right and a little wrong all at the same time.
The thing you absolutely don’t want to do is become so attached to your cash that you never get back in. Cash is comfortable in a bear market but if you get stuck there, as so many investors did in 2008 and 2009, you will regret it someday.
The one thing to remember is no one perfectly times these decisions.
In a recent memo, Howard Marks wrote, “The investor’s goal should be to make a large number of good buys, not just a few perfect ones.”
When Dollar Cost Averaging Matters the Most
1And my colleague Nick already ran all of the numbers here.