The SPDR S&P 500 ETF Trust (NYSE: SPY) has a shaky start to September, and history suggests the second half of the month could be weak as well.
Long-term investors with cash in their accounts are probably asking the old Wall Street question: Should I move all in on the downside or the average dollar cost in a position as the S&P 500 drops?
Callie Cox, senior investment strategist at Ally Invest, recently discussed this debate on the best approach to establish or strengthen a long position in the market.
Related Link: Key S&P 500 Levels To Watch As The Market Suffers 4th Consecutive Day Of Losses
What is the average cost in dollars: Average dollar cost is figuring out how big of a position you want to take in a stock or ETF, then dividing that total position size into smaller increments and buying your full position in chunks over time. rather than investing a lump sum all at once.
To test the average dollar cost as a strategy versus investing a lump sum, Cox compared two different approaches to investing in the S&P 500 since 1950.
The first approach is to immediately put $ 10,000 on the market and then add an additional $ 10,000 every 100 months, or about 8.5 years. The other strategy is to invest $ 100 on the first day of each month for 100 months. In theory, investors invest the same principle in the market anyway.
And the winner is: Cox found that the flat-rate approach has outperformed the cost averaging approach for 85% of all 100-month periods since 1950.
“In a market that has generally risen more than it has fallen over the years, it is ideal to invest as early as possible. This is especially true the longer you invest, ”Cox said.
Cox said one of the biggest challenges with flat-rate investing is the psychology of the market. When you invest all of your money at once, all of your risk is tied to the day you invest rather than being spread over a long period of time. If you don’t go all of a sudden, you probably won’t be wondering when to buy and how much the market is going up or down at any given time.
Still, the data suggests that flat-rate investing is the smartest approach the market takes over time, unless you’re one of the few skilled traders who can consistently identify the small windows in which the average costs. in dollars outperformed 15% of the time.
Benzinga’s point of view: If you expect the stock market to rise over an extended period of time, you still want to get as much money as possible out of the market as early as possible in order to maximize your returns.
Any money you leave on the sidelines as part of an average dollar cost strategy weighs on your overall returns, unless the stock market consistently trends down after your first redemption date.