Tom Talks about Dollar Cost Averaging
Transcript:
Katie Nealis:
We have a question in from Terrell saying I have a lot of cash to invest and am unsure of if I should invest it all at once. Do you have a strategy for doing partial investment periodically?
Tom Vaughan:
Yeah, I think what what you’re talking about, there’s what we call dollar cost averaging. So there’s, you know, there’s two processes there, one would be kind of the thought process of lump sum. And the other and actually, let me share my screen again, I can kind of show it to you here just on this chart. So if you look, here’s the s&p 500. So if we happen to be right here, for example, if we go back in time, and you lump sum the money in you know, well, it drops quite a bit, right? Before you get to, you know, a point where, you know, eventually it comes back. And so you can make an argument for dollar cost averaging where say, every month, you know, each one of these little bars is a month you’d put money in. And that actually works very, very well for kind of protecting yourself from, you know, these particular downturns. The problem with doing a pure dollar cost average versus a lump sum is just that if you look at this chart, it spends most of its time going up. And so what that means, if you look month by month, if you were to look at each one of these months, and look at how many times it was going down versus how much it goes up, the market goes up more than down, at least in this 25 year period. And I would assume you know, that might be true going forward also.
So when you dollar cost average, you could be you know, you’d be better off, if you had a lump sum right here, just putting it in correct. Instead of dollar cost averaging all the way up here, because you would have been better off investing all of it up front. So generally speaking, unless there’s something pretty substantially strange about the situation, we actually do lump sums, although we’ll do it in a kind of measured manner. So I have 15 pieces on the stock side, and five pieces on the bond side of my portfolios. And I generally have a buy or a hold on all of those at any point in time. So when new money comes in, you know, we just wait until that one section that we’re gonna buy is doing okay. And so we’ll buy those, and we’ll wait for the other ones. And so we kind of use, I guess, we’ll call it a more intelligent dollar cost averaging methodology to come into the market. And that way, if if the whole thing is falling apart, you know, we sit in cash, which is exactly what happened last year, had money coming in middle of February, beginning of March market is falling apart, we didn’t buy anything until April, we just held on to that cash. And so I think that’s kind of, you know, measured way of doing dollar cost averaging.
Generally speaking, dollar cost averaging is done in a more appropriate manner, by money that you don’t have, so that you’re going to have in the future. So if I have 50,000, now, I’m going to put that in the market, I’m going to buy what I have on my buy list and wait for the other things to turn into buys. And then if I have an extra $100 a month, that’s what I’m going to dollar cost average with going forward. So that’s how I look at it again, you just have to look at the probabilities, the probability is that the market is going to go up from where we are, and doesn’t doesn’t mean it’s 100% probability, but that is, that’s the bet. So I’d probably do a lump sum in a buy hold fashion where I would buy what I wanted to buy piece by piece. And then I would dollar cost average with future money that’s coming i