Getting Started (Part 4) – Investing

January 31, 2013

Many investors use a New Year as a time to get their investments in order. To help, we’re launching a series of posts to help investors who are just getting started with a new investment program. We’ve looked at the importance of having a plan, why investors need stocks, bonds and cash, and how to use NoLoad FundX to create a balanced portfolio. Now, it’s time to consider how to get invested.

Now that you know why you’re investing (your plan) and how you’re investing (your allocation), the next question is how to start investing. Should you get in the market gradually through dollar-cost averaging or all at once?

When a client adds money to an account we are managing, we tend to get assets invested fairly quickly because the long-term trend of the stock market is up.  In fact, a number of studies have confirmed that investing a lump sum at one time is typically a more profitable approach than moving into the market in stages. But getting into the market all at once can be psychologically difficult, especially in volatile market conditions. Too often investors stay on the sidelines, waiting for just the “right” time to invest.

One way to get invested is to move into the market gradually by dollar-cost averaging. Investors who dollar-cost average set up an investment schedule and put a portion of their assets to work each week, month or quarter. This process can help investors who are worried about market volatility because, by investing just a little of their portfolios at a time, they are subjecting just a portion of their portfolios to market-level risk.  This diminishes the risk of regret: if the market goes up after you’ve made a partial investment you can say, “at least I have part of my money in the market.”  If it goes down, you can reason, “at least I have part of my money still in cash.”

We suggest that investors who are concerned about volatility consider investing in a more conservative portfolio that includes bonds. A portfolio balanced between the Monthly Upgrader Portfolio and the Monthly Flexible Income Portfolio, for example, offers better returns than sitting in the sidelines in cash, and it has been less volatile than an all-stock portfolio. For some investors, a conservative portfolio that provides more consistent returns can help them get back in the market and stay invested, while others may use a more conservative portfolio as a stepping stone and gradually shift to a more aggressive allocation as their confidence builds.


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