Investing During Volatile Times
The great philosopher Mike Tyson famously said, “Everybody has a plan until they get punched in the mouth.” As investors, we know how that feels: when the market turns volatile, it can feel like the former champ has punched you in the mouth and followed up to the gut. But planning now for how you’ll invest later during periods of market stress—and sticking to that plan—can set you up for long-term investment success.
The stock market is often unpredictable, so trying to time purchases of securities for optimal performance isn’t a plan—it’s a wild goose chase. Only in investors’ fantasies do the stock market gods ring a bell when stocks hit top and then ring it again when it hits bottom. But by tapping into the potential of dollar-cost averaging, which is the periodic investment of a predetermined amount of money in a chosen stock (or other security) regardless of its price, investors can stop trying to predict short-term market moves and focus instead on building the consistency needed to navigate market fluctuations. This approach is so simple that novice investors can use it, yet it’s so effective that seasoned traders do, too. By making a plan and sticking to it, dollar-cost averaging lets investors walk away from the emotional rollercoaster of worrying about what to do during each new period of market stress.
This systematic strategy is particularly good at curbing the risks that come with emotional decision-making and attempts to time the market, because investors who invest a fixed sum at regular intervals accumulate more shares when prices are lower and fewer shares when prices are higher, effectively balancing their investment costs over time.
Example: Suppose you decided to invest $1,000 per month in the undervalued company Boyar Enterprises. In January, if shares were trading at $7.50, you’d be able to buy 133 shares. In February, if the price surges to $10, your $1,000 will buy another 100 shares. But then if the stock drops to $5 in March, your $1,000 allows you to purchase another 200 shares. You’ve now lowered your average cost per share to $6.93 on the 433 shares you cumulatively own. If the shares then rebounded to $7.50—the exact same price as when you first began dollar cost averaging—you would have made a tidy $0.57/share profit, or about an 8% capital gain!
This practical tool can help you smooth out your costs over time while maintaining a disciplined approach to investment management, particularly during market fluctuations and times of economic uncertainty. But, as always, don’t buy stocks blindly: if your investment thesis on a company changes, and you conclude that it’s no longer a solid investment, then you’ll want to reconsider your plan. Dollar-cost averaging gives you a way to accumulate shares in a company slowly, over time, without letting market volatility skew your decision-making.
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