Let’s face it – financial markets don’t like uncertainty. They’d be just as happy, bopping along at a steady pace without any bumps in the road.
Unfortunately, that’s not the world we live in.
Let’s take a look at what’s happened in 2020 already:
- The coronavirus
- A drop in oil production
- The upcoming election
- Rate cuts from the Federal Reserve
- Treasury yields at an all-time low
And it’s not even the end of the first quarter.
All of these potholes might make you feel like you’re heading for an enormous sink hole when it comes to your investments. But the long-term investor knows how to plan for uncertain times – and even how to look at the positive side.
With Uncertainty Comes Options
When the market feels uncertain, it’s often difficult to take the “long view,” but when it comes to investing, that perspective is what can give you peace of mind. The only thing that’s certain when it comes to the stock market is that fluctuations will occasionally happen. It’s how we respond that makes the difference.
This is when working with a trusted advisor can mean the difference between understanding your risk tolerance and feeling out of control with your financial future. Here’s an example of a strategy that I often use with clients that helps them understand how changes to the market affect their overall financial plan.
Dollar Cost Averaging
A long-term strategy that you may want to consider during times of volatility is Dollar Cost Averaging which is when an investor is purchasing the same stock/fund at different times and different prices, but with the same dollar amount each time. Typically used in 401(k)s, this method can also be helpful when the market seems less certain.
Here’s how it works:
An investor would take whatever amount they want to invest (a fixed or lump sum dollar amount) and divide it up over a specific time period to be invested in typically a stock or fund. Here’s a hypothetical example: An investor has $12K they would like to invest over a year. The investor would take that $12k and divide it by 12 (12 months in a year) and determine that they would like to invest $1,000 every month for that year.
The investor could also flip the equation and decide that they want to invest on a monthly basis over a fixed time. Here’s another hypothetical: The investor has $500 a month to invest in a stock/fund during an entire year. In the end, they would have invested $6,000. No matter how the investment is performing, the investor still puts in the same amount.
Again, this is a long-term strategy that may be worth considering for beginning investors, and during times of volatility. The bottom line is that the number of shares the investor purchases each month will vary based on the price on the day of the month they have set to buy shares. Its goal is to offer wealth building potential and to reduce an investor’s average cost per share over a long period of time.
Weathering the Stock Market Storm
While I know you might still be nervously watching the market’s fluctuation, I hope that you’ll remember that the news isn’t all bad. With sound investment strategies (like Dollar Cost Averaging) and low interest rates (if you’re thinking about refinancing, now’s the time), the long-term investor has a lot of options to consider.
But it could be time to talk about all of this with a trusted advisor. Knowing someone has assisted you with your goals and financial planning can be the difference between peace of mind and sleepless nights. CLICK HERE to schedule an appointment and we’ll discuss any questions you might have.
Melissa Thompson is an Investment Advisor Representative holding a ChFC® designation in the Castle Rock, CO and Denver, CO areas who focuses on educating individuals and small businesses about the importance of protecting and growing their financial assets. “My preliminary meeting process is a chance for us to talk about where you are and where you’d like to go. You’ll have the opportunity to make sure that my services fit your unique needs before you commit to moving forward. I look forward to creating life-long relationships with my clients and taking the fear out of financial planning.” To schedule a consultation with Melissa, CLICK HERE. (3/12/2020)
Dollar cost averaging does not guarantee a profit or protect against a loss. Investors should consider the amount they are able to contribute according to their financial ability over an extended period of time. All numeric examples and any individuals shown are hypothetical and were used for explanatory purposes only. Actual results may vary.