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Invest Well. Live Well: Should I invest now?

This year, 2022, has been a tough start to the markets. Concerns of inflation and central banks raising interest rates have been front of mind. The U.S. S&P 500 had its worst January in more than 15 years — yes, even worse than 2009.
Invest Well Live Well2

This year, 2022, has been a tough start to the markets. Concerns of inflation and central banks raising interest rates have been front of mind.

The U.S. S&P 500 had its worst January in more than 15 years — yes, even worse than 2009.

Market corrections are never fun, but are a natural part of the ebb and flow of investing. Volatile times like this can often raise the question, "Should I invest now?"

We look for potential ways to increase successful outcomes. One strategy we have used over our careers is called dollar-cost-averaging (DCA). This is a fancy way of saying investing regularly over a time period.

Generally, investors have three choices:

• Invest a lump sum and ride the waves.

• Wait for the market to fall and buy at a lower point.

• DCA into the market to spread your risk.

Historically, option No. 1 has the greatest chance of success. A 2012 Vanguard white paper compared the results of an immediate lump sum investing (LSI) in a balanced portfolio (60% stocks and 40% bonds) versus buying equal amounts over a 12-month period in U.S., U.K. and Australia.

The study measured rolling 10-year periods from 1926 to 2011 and found the lump sum method won 67% of the time. Furthermore, depending on the country people were invested in, LSI added between 1.3% to 2.4%. However, the study did not factor in the current valuation of the stock market.

Another study done by Bloomberg in April 2018 found that DCA when markets were high helped reduce potential losses by nearly half

Most people want to do option No. 2, but this means you have to have the fortitude to buy when markets are dropping and the news is grim. Investors already fully invested need to get it right twice. They have to pull their money out at the top and put it back in when markets have plunged.

We have yet to see investors succeed at this because when things are bad, investors tend to expect market to go down further and typically decide to wait. Often, they are left idling in cash, earning very little and paralyzed to make a decision. No one has perfect foresight and we suggest using a strategy that removes emotion and guessing market highs and lows.

What we like about option No. 3 is that it has a psychological advantage and can be very effective when markets are trading at high valuations or elevated volatility.

A simplified hypothetical example may help illustrate: Investor A has $100,000 and, on Jan. 1, buys 5,000 shares of an investment at $20 a share. By June 30 of the same year, the shares drop to $15, then recover to $20 by the end the year.

Alternatively, Investor B buys in two lump sums of $50,000 each on Jan. 1 and June 30. This would result in buying 5,833 (2,500 plus 3,333) shares at an average price of $17.14. Amazingly, at the end of the year, she would have made $16,660, or 16.7%, while the actual investment returned zero per cent.

Invest Well DCA

Typically, the best investments to dollar-cost-average are stocks because their prices change daily. If you can, you want to buy as frequently as possible because it gives you the opportunity to buy at potentially lower prices.  With DCA, you actually want temporary market corrections to enhance your future returns.

Until next time, invest well and live well.

Written by Eric Davis.

The views expressed are those of Eric Davis, senior portfolio manager and senior investment advisor, and Keith Davis, associate investment advisor, TD Wealth Private Investment Advice, as of April 14, 2022, and are subject to change based on market and other conditions. Davis Wealth Management Team is part of TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc. which is a subsidiary of The Toronto-Dominion Bank.