It’s Not About the Timing, Timing, Timing

So I have this weird friend who is super random and texts me like the most RANDOM texts ever (No hate here, we’re good friends and she’s totally cool that I’m blogging about her hahahaha). After not hearing from her for like 2 months, I get this text message:

“Hey lionie~ What % of your money do you put in STI and what else do you put your money in? Do you think now is a good time to go in?”

First of all, nobody calls me “lionie” (zomg?!). Next, I really love the phrase “do you think now is a good time to go in?” because hell, it’s on everybody’s minds isn’t it? Everyone is obsessed with when the “right time” is, as if there’s some sort of magical moment to invest that’ll make you rich like, forever. I can totally see why: It’s the same reason why buying McDonald’s lunchtime Extra Value Meals for $4.50 feels so damn awesome – because we’re getting it cheap. Everybody could use a midday Big Mac with fries (mmmmm!) and nobody wants to get ripped off.

We take this psychology to the investing arena, and suddenly, we’re lost. Suddenly, those chicken mcnuggets that were $4.50 an hour ago are now $6.20! Wtf?!! But if I don’t get them now, what if they rise to $12 a piece? Or maybe I should wait and let them fall back to $4 for a six-pack? When is a good time to go in? When? When??? You’re not alone – the professional investing community is obsessed with the idea of timing. Pick up any business newspaper, turn on CNBC, and you’ll see stock calls screaming at you to “Buy” and “Sell” NOW, or be forever banished to the poor house. I hate it – I hate anything that pressures me to do something with my money NOW. This applies to stocks, and those annoying “Call now and receive a new abdominizer absuh-lutely FREE!” informercials”. They are way too stressful, and they cause you to make terrible decisions with your money.

What’s the trouble here? This philosophy assumes that investing is a huge, epic, life-changing moment. My friend was super concerned about when she should invest because she saw it as a significant, one-time decision. But think about it – there are a gazillion moments in life. What are the odds that the one you pick to invest your money in will be that one, magical moment when the market bottoms out?

Instead, let’s forget about being “right” and let’s focus on seeing investment as a lifestyle decision, just like brushing your teeth or cleaning up your dog’s poop. It isn’t sexy, it isn’t the most fun, and you’ve got to do it regularly or you’ll end up with a big mess. But if you don’t get it right a couple of times, no one is going to die. That’s a whole lot less stressful, isn’t it? The truth is, the market goes up and down and is volatile as hell. In all likelihood, we’ll never be able to pick the “best” or the “right” time to invest, so why bother trying? So when the ladies come up to me and adoringly ask “Oh, Lionel, tell us when is the best time to go in?” I put on my most charming smile ever and go “Baby, just dollar-cost average.” (Yeah, you know that totally gets me laid).

What is dollar-cost averaging and why is it awesome? Dollar-cost averaging means that you invest a fixed amount of money into the same stock, or ETF, or fund, at fixed intervals. So, for example, you might invest $500 into a certain stock every month, or $1,500 every quarter. The actual interval doesn’t really matter. What matters is that you invest a fixed amount every time. Unlike the “invest all your money at once” mentality, which forces you to predict when is the best time to invest in, dollar-cost averaging is a system, a system that lets you invest at the overall average price of the market and lets you smooth out the price which you enter in.

Say you invest like $1,000 per month into a stock market index ETF. Some months you may be investing when the market is super cheap at $100, so you manage to buy 10 units of it. The next month the market rises to $200, so you only buy 5 units of it. The next month the market falls to $50, so with that same $1,000 you load up on 20 units of it. So when the market is cheap, the system lets you buy more of it, and when the market is expensive, you buy less of it. Overall, you’re pretty much guaranteed the average price of the market. You’re not getting in at the bottom, but you’re also not running the risk of putting all your money into the market, just before it takes a nosedive southwards. With the reasonable assumption that the market is likely go up in the long run, getting in at the long-run average price means that you’re likely to end up in the black, given a long enough time horizon (we’re talking 20-50 years here).

What about periods like 2008-2009, when the market was trending down? People who dollar-cost averaged got themselves into market at lower and lower prices as the market fell, accumulating all those units at cheap prices and making themselves well-positioned for the recovery from March 2009. Contrast this to the herds of investors who piled into housing stocks at the height of the bubble, only to watch their nest egg crumble in 2008, and then panicked and sold right before the recovery. Dollar-cost averaging works best when the market is at its most volatile, because it helps you to take advantage of the volatility by buying a both high and low prices to average out your buy-in price. I’ll spare you the details, but this video from Mike at Oblivious Investor shows how with dollar-cost averaging, the volatility in the market goes from being your enemy to your friend.

What’s even more awesome? Most academics and economists are already predicting that we’re going into an age of increased volatility with more crashes and more bubbles, occurring at increasing frequency. Even more reason not put all your money in at any one time, because you never know what’s going to happen tomorrow. So why risk it?

Like any system that I love, it can totally be automated. Most fund providers offer the option of a “Regular Savings Plan” or a “Drip-feeding” plan that lets you dollar-cost average a pre-determined amount into whatever security you choose. Even if you choose not to automate it (I don’t because my broker doesn’t let me), it takes a couple of clicks to invest a fixed amount at regular intervals. No stress, and no worries about where the market is going to go tomorrow. Just a plain, simple system. It ain’t sexy, but it works.