This post is about dollar cost averaging (DCA) vs. the marvelous time spent in the market. You see time in the market and dollar cost averaging are two of the greatest strategies used to build wealth in the stock market.
Time in the market will beat dollar cost averaging any day. If you can do both that’s great, but if you can only chose one then buy and hold on for dear life. $1000 placed into the market with an 8% rate of return would accumulate $2158 vs. $1566 by DCA $100 a year over 10 years. $2000 placed into the market with an 8% rate of return would accumulate $9371vs. $4946 by DCA $100 a year over 20 years and $3000 placed into the market with an 8% rate of return would yield $30K vs. $12K by DCA $100 a year over 30 years. If you combined the strategies and did both DCA with the same initial lump sum investment you would end up with $4K, $14K and $42K at 10, 20 and 30 year intervals.
At 10 years it’s almost a toss up, but at 20 years time in the market really starts to pull away from the pack. Time in the market does the heavy lifting and DCA is the frosting on top and the younger you are, the more time you have. That’s why starting early is key. That’s why opening up a UTMA or a custodial account for children is important, especially if they understand this concept when they take control of the account at age 18 or 21. To be honest understanding this concept that time in the market is #1 when it comes to investing is way more important than opening up a custodial investment account in the first place.
Time moves the needle more than contributions and this can be seen in 5-10 year increments . Holding a position for 10 years on average is everything.
Let me just clarify some terms. A correction is a decline of 10% or greater in the price of a security, asset, or a financial market. Corrections can last anywhere from days to months, or even longer. A bear markets occur when prices in a market decline by more than 20%, often accompanied by negative investor sentiment and declining economic prospects.
A correction occurs on average every two years and a bear market occurs every 4 years on average. As stated before a correction can last from days to months, but a bear market can be cyclical or longer-term. Cyclical bear markets can last for several weeks or a couple of months and longer term bear markets can last for several years or even decades. The longest bear market in history lasted for 25 years. During this time the market didn’t hit all time highs for 15 years where the average time to return to all time highs from a bear market is around 5-7 years.
Thus when a bear market occurs we should be expecting our money to be locked up and indisposed of for 5 years at the minimum and 15 years at the maximum end, because this is the amount of time that you may be under water. We all need to plan for this and this is especially why money that is meant for spending within 5 years should not be placed in the stock market also why we should add bonds at least 5 years away from our deaccumulation phase.
So in essence, at the next market crash it may take 6 months, 1 year or over 15 years to hit market all time highs again and no one knows exactly how long it will take. This is one of the reasons why some people hate the stock market. It’s unpredictable.
If this is a major concern to you then you may need to diversify portfolio into bonds and cash flowing Real-estate. Don’t avoid stocks, just decreases your exposure to them; and of course make sure you have a good 6 to 12 month emergency fund.
There are so many recommendations, stock tips and forecasting in the market right now that it will make your head spin. What is needed more than anything right now is patience and persistence. Stick to your investment plan and maintain your emergency fund.
As the bull market rages on, hot stock tips can be found on every corner and new IPO’s are coming out on a daily basis. Millions of dollars are flowing into the stock market daily. Let the good times roll.
You may call me a permabear or a pessimist, but I’m very concerned about buying stocks in this current market environment. The only stock that I’m not concerned at all about buying at all time highs is a total stock market index fund. I’ll buy it all day everyday no matter what the price. There are multiple reasons why.
Rich people play the money game to win and poor people play the money game not to lose, but it’s a spectrum.
I recently read The Millionaire Fastlane when I ran across this principle, but I realized that there is actually a middle ground. It’s for those that are in the getting rich slowly lane. The book calls the middle ground group the slow lane travelers.
Earned income is the hardest income to protect from financial predators and we need to do all we can to reduce our tax burden. One of the best ways to do this is to use your taxable investing account as tax efficiently as possible. This article will enable you to do just that.
Shares of stocks or index ETF should be bought or acquired in quantities of 10’s, 100’s and 1000’s of share. Try to acquire a minimum of 10 shares of each position. There are multiple ways to do this. You could limit the price of each stock or index ETF to $100 and just keep buying and dollar cost averaging until you have 10 shares. You could also microinvest and buy fractional shares. If for example you want to buy Amazon that costs $3K a share, you could buy 0.1 share or 10% of the share price a month until you have ten shares. If you were to continue to dollar cost average in this manner it would take approximately 10 years to accumulate 10 shares or you could buy an index fund and purchase thousands of fractional shares of stocks a year.
I wrote about the Investors owners contract in my last post, but this is my version of a passive investor contract that is meant for passive investors that invest in index mutual funds and index exchange traded funds.
The funny thing is, I could have titled this post “the best is yet to come”, the reason being is that we are in a bubble and I have no idea when or where the top is. But what I do know is that there will be a market crash of epic proportions on the horizon. Likely within the next 2-3 years or so. So what are we to do?