In February 2020, I wrote a blog post about how to invest a lump sum of new cash into the market, either Invest All at Once, or Over Time? There are pros and cons to either strategy, and I discussed dollar-cost averaging as a “lower risk” approach to avoid market timing and the potential loss if invested at an inopportune time. Of course, the results you get are “scenario-dependent” and if the market keeps going up during the dollar-cost averaging period this could turn out to be a losing proposition. Let’s look at a real life case study of a client who recently put a large sum into their account and how it worked out!
The client had “new” cash available that they were ready to invest and had an approved long term strategy in place. Because the new cash was a large percentage of their total net worth and was part of their retirement funds, we decided that a dollar-cost averaging approach was an appropriate strategy. This would add risk to their overall portfolio slowly and avoid the potential of mis-timing the market. This is NOT a market timing exercise but instead is intended to smooth performance by avoiding market timing.
We started putting the funds to work on July 26, 2021; in hindsight, a period of time where the S&P 500 kept plodding higher. The total proceeds were invested into a diversified portfolio of stocks and bonds, however, so during this time some new positions did better and some did worse.
As you can see from the chart below, this dollar-cost averaging approach achieved its goal. The Joint Taxable (JT) account grew from $10,000 to $10,150, almost exactly the same as its benchmark, the iShares Core Growth ETF (AOR), if it was invested all at once on July 26. As it turned out, the overall risk for both approaches over this short time horizon was about the same, but it could have been much different. Most notably, the dollar-cost averaging approach avoided putting all the funds to work at some recent high points on August 13 or August 27 that would have diminished it performance. Alternatively, we did miss some low points on August 19 that would have improved performance. But this is the point, no one knows!
So, luckily there was no market downturn to avoid during this short time period and the new funds were invested neutral to its benchmark. At Dattilio & Ash we look at both risk and return and strive to manage all aspects of your investment needs in a prudent manner as we manage your portfolios to help achieve your goals.