When investing, it is no secret, the goal is to buy low and sell high. For the past few years though, the stock market keeps hitting new highs. Does this mean an investor should stay on the sidelines? There are several strategies you can use to put your money to work with where the market is today.
Dollar Cost Averaging
The first strategy requires very little money. It is called dollar cost averaging. This method is great for someone who is nervous about putting a large sum of money into the market at once, or someone who is building wealth and only has a small amount to invest every month. The underlying principal of this theory is that markets are always rising over the long term, but can go down in the short term. By putting a little in every month, the average price per share you pay will be lower. If the markets keep rising, you will have gotten some money in early and if the markets sell off you won’t have put everything in at the top. If you don’t have a large sum of money to start with, putting in a little every month will naturally follow this strategy.
Markets are not predictable
Maybe the market felt high five years ago and you stayed out. Over that time period, the S&P 500 has almost doubled (on October 4th, 2013 the S&P 500 closed at 1,690.50 and on September 24th, 2018 it closed at 2,914.00). Trying to time the market is extremely difficult and many view it as a losing strategy. If the market is expected to rise over the long run, and if it then dips over the next few months, your investment will recover - provided you have a long-time horizon. If you have a more short-time horizon, like an upcoming retirement date, consider a more conservative portfolio where market swings won’t upset your goals. Lastly, stocks do generate income in the form of dividends which can help cushion some of the market volatility. By reinvesting these dividends, you will be buying more shares at a lower cost bringing down the average cost per share.
There are many markets
We hear about the stock market every day and people usually think about the Dow Jones Industrial Average or the S&P 500. The Dow Jones Industrial Average is a measure of just 30 U.S. Large cap companies and the S&P 500 is the largest 500 U.S. companies. While these are the most often quoted benchmarks, there are many companies not represented in those indexes or even parts of those indexes that may still look attractive. In addition, U.S. stock markets only represent about half of the investable stock universe! While we may be hearing about pricey markets here, opportunities to invest overseas may be an option.
There are many ways and strategies to invest. Working with a CERTIFIED FINANCIAL PLANNERTM Professional can help determine what will be the best path for you. However, consider that not everything has to be invested at once. Trying to time the market is very difficult, and there are many avenues into stocks beyond large U.S. companies.