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
|1 Year||3 Years||5 Years|
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!
David Rappaport, CFP®
David is the Co-Founder of Rappaport Reiches Capital Management. He acts as personal CFO to entrepreneurs and corporate executives, providing organization and clarity in their finances. Please connect with David below. He loves to talk about investing, financial planning, and Aspiritech, a non-profit hiring individuals on the autism spectrum.