Should You Get Invested Right Away or Over Time?

January 8, 2015

gettinginvested-sep2014What’s the best way to invest in stocks?

Should you get invested all at once or invest gradually by dollar-cost averaging?

Investing All at Once

Getting back into the market all at once is typically the most profitable since the market goes up more often than it goes down, but it can be psychologically difficult to do.

This approach can leave investors waiting for the ‘right’ time to invest. If markets are high, investors might decide to wait for a sell-off in order to invest at lower levels. If markets are falling, they may decide to wait until markets stabilize before investing. As a result, investors who aim to go “all in” may end up out of the market for years.

Investing Over Time

Investors who put their money to work gradually through dollar-cost averaging eliminate the need to find the ‘right’ time to invest. By investing a set amount each month or quarter, investors buy more shares when prices are low and fewer shares when prices are high. This approach can also help investors stay invested. If the market corrects while they are getting invested, only a portion of their portfolio will be affected.

But how much of a financial sacrifice is dollar-cost averaging? In 2014, Alliance Bernstein compared the returns of investing immediately in the S&P 500 versus investing gradually through dollar-cost averaging, analyzing every rolling 12-month period since 1926 (results are shown in the chart above). Rolling periods offer a comprehensive picture of all possible outcomes, regardless of when investors happened to start investing. (This research was featured in the New York Times on August 17, 2014.)

Getting invested immediately did produce higher returns, gaining an average of 12.2% a year since 1926. But investing gradually was a far better option than not investing at all. Investing incrementally gained 8.1% versus 3.6% a year for cash.

The Best of Both Worlds

We suggest a combination of these two investing approaches. We typically invest a significant portion (30-50%) of an account right away. This way, we have meaningful participation in any market gains that occur while we’re putting the rest of the account to work, and we don’t wait on the sidelines for the ‘perfect’ time to invest.

We invest the rest of an account gradually, either on a monthly basis or when the market pulls back—whichever comes first. This can enable us to buy in at lower prices and helps us capitalize on market corrections.

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