Plunking money into the stock market is a weird psychological trick. No matter how much evidence is out there, about ‘time in the market’ being valuable, there’s a bit of fear putting a bit in — even for myself who’s well studied the market extensively.
Nobody wants to loose money. Nobody wants to see the value of their investment go down. How would you feel if you’re portfolio lost 10%? What if it were 50% as we seen in 08/09? It would hurt. And that’s why investors block exists. No one wants the pain. No one want’s to feel like they made a bad decision. But the risk we assume by investing is part of what makes the future returns possible.
I’m not exempt from those emotions either. I’ve dealt with them. I’ve kept investable cash on the side waiting for ‘a better time’.
So how do you get over the fear block?
Dollar. Cost. Average. That’s the secret. Invest little chunks of money consistently. If you’ve got a large sum, say $100,000 (or whatever large is to you), invest $4,000 per week for 25 weeks (about 6 months). Stretch it out even longer if you want. By doing this, you’ll diversify your purchase price with makes you less susceptible to the disposition effect of investing a lump sum. In other words, you’re not going to look at your portfolio that started off as $100,000 and see if it went up or down. You’re not going have a starting point to compare to your total returns to and deal with the ‘pain’ of investing at the wrong time.
Instead you’re going to buy in on some ups, and some downs. As little chunks enter the market periodically, you’re going to lose track of the amount you had initially invested. Once you’re in you won’t have a psychological starting point. If you’re not working with a lump sum, just systematically invest a little bit every week, or month. As with the example above, you’ll lose track of the starting point and it won’t be painful.
Psychological Benefits Of Dollar Cost Averaging
- Diversifies purchase price, which makes you less susceptible to the disposition effect.
- Reduces anxiety of having bought “at the top”
- Gives you a concrete plan for moving out of cash and into a higher riser risk/return portfolio.
I can’t imagine not dollar cost averaging. I do it every week. Although my income comes in unsteady chunks, I never invest it as soon as a can. My brain won’t let me. So I dollar cost average.
Know this, even if you are ‘world’s worst market time’, and invest at market peaks, but are in it for the ‘long haul’, you still would’ve done rather well as explained on A Wealth Of Common Sense (an awesome blog btw).
Also Read this: What If You Invested $1,000 Per Month For The Last 10 Years.