Should You Invest Gradually into the Market or Jump in all at Once?

No one likes to lose money. From an investor’s point of view, nothing’s worse than for their money to go down immediately in value after they make an investment.  Jeff Sommer of The New York Times addressed this in his August 16, 2014, article “Hesitating on the High Board of Investing.”  This enlightening article addresses related investment issues.

The first one I’ll discuss is “How long does it take to get one’s initial lump sum investment back if the stock market crashes right after you make your investment?” This query assumes one invested in the S&P 500, and all dividends were reinvested. The worst 12-month period began on July 1, 1931, when during the Great Depression, the stock index lost 67.6%. . .ouch.  Assuming you stayed in the market, it would have taken 39 months to erase all the losses and break even.

More recently, the worst 12-month period began on March 1, 2008, when the market’s return was minus 43.3 percent.  We all know people who bailed out of the market and never went back in.  But if you had stayed fully invested, you would have recovered all your losses in 22 months!  What’s more, you’d be sitting on enormous gains today.

Of course, those 22 months can seem like 22 years, and the losses often cause people to be more conservative with their investments.  One way to be more conservative when investing in the stock market is to invest gradually in the market (dollar-cost averaging) as opposed to investing a lump sum.  Sommer’s article cited a study by Bernstein Global Research which, between the years 1926-2013, compared investing a lump sum over a 12-month period compared to more than 1,000 one-year periods.

Interestingly, the research showed that the average one-year return for the lump sum investing was 12.2% compared to 8.1 % for the gradual 12-month investing.  In other words, the lump sum investor earned 4.1% more return on their money!

Despite the conclusions of the research, lump sum investing may not be for everyone. The first rule of investing is to know thyself, and if you feel that investing all your money at once and having it go down in value would cause you to bail out, then perhaps it would be better for you to invest gradually.  In my next blog, I’ll take an unusual look at the benefits of “losing money.”

Trying to Outguess the Markets is Like Being Stuck in Traffic

One day last week, I was home sick, and I committed a cardinal sin:  I turned on Fox Business News for the pre-opening “stock market report.”  Charles Payne, the anchor, opened the show with the “distressing August unemployment figures.”  He was worried because “no new jobs were created in August 2014.”  (Never mind the fact that the date was September 3, and these reports are always revised later in the month).

Payne then interviewed two economists to discuss their views on the latest jobs report. The first economist thought it was very dire news and job creation may have peaked for the year.  The other economist sounded more reasonable stating that year-to-date job creation has been very good and that August may have been a seasonal adjustment. He also said that the data showed we were trending in the right direction.

Mr. Payne seemed pensive and clearly stated that he believed the more negative prediction of the two economists. But here’s where it gets good:  Mr. Payne then stated that these employment numbers were so bad that the stock market would drop 200 to 300 points that day.  Very scary indeed.  At that point, I decided that I had had enough and dozed off for the rest of the day.

When I turned the TV back on around 4 p.m., I saw that the market did not drop anywhere near Payne’s prediction.  Instead it was up about 80 points for the day! One would think that Payne, a principle in the stock research company Wall Street Strategies, would know better than to attempt to predict the short-term direction of the market.  Maybe being a purveyor of financial news has convinced him to try fortune telling.  Regardless, anyone who’s new to financial journalism will discover that networks grab ratings with two things–bad news and convincing people they know something that you don’t!

Academic stock market researchers have discovered that stock prices are decided by not one single person but by all of us.  In other words, together we know more than we do alone. It is estimated that there are about 39 million stock trades a day equaling nearly 200 billion dollars.  Many people are convinced that to get ahead, they must know where the markets are going.  WRONG!  By trying to anticipate the moving of the markets, they are competing against the knowledge of all those millions of buyers and sellers.  What’s more, they’re taking unnecessary risks.  It’s like being stuck in a traffic jam on the freeway.  Your lane isn’t moving, so you switch to a lane that is moving.  In and out.  Switching lanes, however, adds anxiety and increases your risk of an accident.  Moreover, you haven’t gotten ahead because the lane that was moving is now stopped.

If you want to better understand how the markets work, watch this simple three-minute video, The Power of The Markets: