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The Market Just Hit a New High.  What Should You Do With Your Bonus? Thumbnail

The Market Just Hit a New High. What Should You Do With Your Bonus?

As Covid vaccines begin to be distributed, investors are looking forward to a robust recovery next year.  The U.S. markets are trading at all-time highs.

Perhaps you have received a year-end bonus and are wondering if you have already missed the best returns. Should you wait for a pullback before adding more money to your portfolio?

While taking a wait and see approach may sound appealing, there’s no telling when the next downturn will happen. And looking at market history, stock returns after the S&P 500 index has hit all-time highs have been strong:

S&P 500 Average Annualized Compound Returns After Market Highs, 1926-2019

Forward Period
1 Year 3 Years 5 Years
13.9% 10.5% 9.9%
Source: Dimensional Fund Advisors.  See Note 1.

You're still nervous?  We get it.  Here's a solution...

Dollar cost average new money into the markets, which means spreading out additions to your investment portfolios in equal installments over a set time period.

Here's how it works. Let's say that you get a bonus of $50,000. Instead of investing all at once, add $10,000 each month for the next 5 months. What day each month should you invest? It really doesn't matter much, just be consistent.

The benefit— you have "diversified" your entry into the markets with smaller sums over different dates. That should give you peace of mind, and also prevent "investment paralysis", meaning not taking any action at all.

We use dollar cost averaging strategies all the time with clients. We often say that 5 or 10 years down the road we will have forgotten how we put new money to work— but the important thing is that we did!

1. Past performance is not a guarantee of future results. In US dollars. New market highs are defined as months ending with the market above all previous levels for the sample period. Annualized compound returns are computed for the relevant time periods subsequent to new market highs and averaged across all new market high observations. There were 1,127 observation months in the sample. January 1990–present: S&P 500 Total Returns Index. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926–December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. “One-Month US Treasury Bills” is the IA SBBI US 30 Day TBill TR USD, provided by Morningstar. There is always a risk that an investor may lose money.
The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only.  Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.