August 19, 2022
Should I buy the dip or move all my money into cold hard cash?
By now, if you’ve been keeping up with the news, radio, this blog, or whispers at your local gas station and grocery store; you should have an idea as to what has caused inflation to rise and the factors that are making it burn hotter than it has in the last 40 years. Regardless of the fact that inflation dropped slightly in the last month, we know that it is not going to drop to 2% overnight. The question that you may be asking yourself is “how should I be invested?”
We’re losing money at the pump, in the stores and in our investments. What do we do?
There is no one-size-fits-all answer, and we cannot predict nor time the market. But what we can do is follow some general principals that have served us well in the past and will hopefully continue to do the same in the future. Please keep in mind that past performance does not guarantee future results.
1. Dollar Cost Averaging
There are two ways to contribute to your investment accounts. A lump sum that is deposited at one time, and periodic contributions at a predetermined frequency—usually bi-weekly or monthly. The latter is known as Dollar Cost Averaging (DCA), and it is the practice of spreading out your purchases in order to reduce timing risk.
Let’s say John and Jane both have an IRA. John deposits all $6,000 into his account on the same day and buys a mutual fund for $25 per share. Because he bought his shares all at once, his average cost per share is $25. Jane contributes $500 to her account every month and buys the same mutual fund. In month one, it costs $25 per share. Month two; it costs $20 per share. And in month three, it costs $26 per share. At the end of the year, Jane has an average cost per share of $20 and owns more shares than John. When the market recovers and their mutual fund rises to $35 a share, they have both made money but Jane has made more!
By using DCA, Jane was able to smooth out the peaks and valleys over the course of the year and end in a better position than John.
2. Staying invested
Below is an infographic from BlackRock, a large mutual fund company, showing the importance of staying in the market. For some of us, our gut reaction is to sell off our investments and wait it out in cash. Here’s the problem; no one can tell the future. Who knows if you’ll be able to get back in when the market rebounds? We saw this happen during the pandemic. Some people pulled out their cash to stockpile guns, gold, and toilet paper. Two months later, the market recovered and then proceeded to double from its bottom in less than a year[i].
3. Maximizing Fixed-Income Investments
For some of us, we read the words “stay invested” and nearly had a heart attack just thinking about being invested at all. That’s okay! Not every investor is willing to take the same risks. One way to grow your portfolio while taking on less risk is through fixed-income investments. As inflation has risen, the Fed has increased interest rates in an attempt to cool off the economy. This means that we can invest in individual corporate bonds, Treasuries, and even CDs and potentially get a better rate than we’ve had in many years. Now, it may not be enough to keep pace with inflation, but earning anything is more than earning nothing—or worse. The benefit to this strategy is that we can invest in fixed-income with short-term maturities and either continue investing in fixed-income when our bond or CD comes due, or we can take our returned principal and get back in the market.
In any event, it is important to be aware of your options and to separate your emotions from your investments as best you can. If you have questions about a strategy that I covered or about what options may be right for you, please feel free to contact me today!