Should You Be Dollar Cost Averaging During the Coronavirus?

it's Brian Preston the money guy so let's talk about dollar cost averaging sound another tool that I think is so powerful because why do we even talk about dollar we talk about dollar cost averaging whether we're in good markets bad markets normal markets it doesn't matter but they're especially powerful in a very crisis driven market because there's so many irrational things going on the news media is freaking you out your relatives are freaking you out you know everybody it seems like you talk to is panicking about what's going on and you're like well I should I stop shell not buy anything else in the future is this the right time to buy was last week the right time to buy here's what we have a tool that will help you know the right answer so again let's go back to just textbook definition here what is dollar cost averaging well dollar cost averaging is an investment strategy that involves regularly and systematically investing into the market often every month or every year so it's systematically entering money into the markets on it on a regular basis now one of the most easy common most familiar ways that every person can think about this is when you're investing in your employer-sponsored retirement plan whether that be a 401k or 403b or 457 or simple IRA those contributions as payroll contributions you're doing are a perfect example of dollar cost averaging in practice yeah and the only thing and this is another thing I want it since this is takes the emotion out of it makes a systematic process think about people we've done episodes we're trying to figure out dollar cost averaging versus lump sum investing you sell a business you sell a piece of real estate you know you come into a big chunk you're trying to figure out if you have a seven-figure payment that has come to you and you're trying to figure out do I put it all in at once or gonna spread it out over a period of time guys this downturn is a perfect example we've shown you this in a lot of research between 10 to 12 months you don't gut your long-term performance but man can you mitigate some major risk if you do spread that money out over time because think about somebody who comes into a million seven figure portfolio right now a windfall if you'd put that money in three weeks ago and then watched I mean even a diversified portfolio potentially probably could be down 15 to 20 percent an undefiled risk assets would be down easily 30 to 35 percent you would be disgusted however if you were buying this over a period of time like I said we typically the research shows 10 to 12 months is not going to gut the long-term performance because there's only a few percent difference in the research at Vanguard and others have done but still it protects you and all of our clients because we do have some that are lump sum investing in fire fact I had a call about two weeks ago with a client we were buying into this downturn and he called me that morning guys hey I know we're slated to buy this morning can we can we cut it off today and just wait a few more weeks and I was like no no you're missing it that is not how systemic dollar-cost averaging works we are just consistently buying all the way through the process that way you're taking advantage of the drive through it mentality that I've already talked about but you're also taking the emotions out of the process so just how powerful can this be again we thought maybe this would be valuable for us to look at a case study an example of how powerful can be so we wouldn't looked and we decided let's not just go back to the Great Recession 2008 let's go even back to the big one to the big nasty dirty one the Great Depression what does that look like and this is what we know if you look at the Dow that the Dow Jones Industrial Average it closed and three hundred and eighty one dollars on September 3rd of 1929 well if you fast-forward 25 years into the future on November 23rd of 1954 it closed at 383 dollars so it would a Houyhnhnm $2 in 25 years that is a I mean this is one of those things were you're like oh my goodness we've gone 25 years I've made absolutely nothing except for the dividends the interest that might be on my portfolio that is a horrible time to be an investor or isn't or is it so we said what if we took a hypothetical $10,000 and we just invested it every single year beginning on September 1st lines in 29 all the way through November 1st 1954 so essentially would be investing 260 thousand dollars over that time period again if you took 260 and just invested on 1929 it had been worth a little bit more than 260 in 1954 if you did a lump sum but if you were to perpetrate this $10,000 per year dollar cost averaging step right through it drive through it and you assume that we just let the dividends reinvest each year what you would have found is at the end of this 25 year period the 260 thousand dollar investment compounded to a value of one and a half million dollars or an eleven point seven percent annualized rate of return guys keep investing take the emotions out of it dollar cost averaging can definitely be your friend and that leads to number four this is I always like to tell people a lot of us will have portfolios that it looks like a quilt like how did I get here you know you have a retirement plan here and so forth and it's not uncommon it's not uncommon that you'll have some maybe grandparents gave us an individual stock you have a mutual fund that you bought but it actually did okay pretty well so you had an embedded game that you didn't want to go generate taxes and it was it was not a great investment but it was good enough that you didn't want to go generate a lot of taxes by selling it a lot of your legacy holdings that you're kind of stuck with this is a great time to reevaluate because usually you can get away from worrying about the taxes as much the impact is much smaller so we are telling people if you have individual stocks or mutual funds that no longer kind of fit into your model and you you know and now taxes are no longer a big issue this is the time to take action yeah it's exactly right one of the things that we believe in is whatever it comes to portfolio design and construction whatever like a new potential client comes to us we don't believe in applecart turnover we just sell everything and buy all new stuff that we would prefer we actually analyze the current portfolio well one of the things we do find is that a lot of clients have those legacy positions this is a great opportunity to either harvest losses in those or even do gain matching where you sell enough losses to offset the gains to have a net neutral trade it's a great opportunity to be doing that so go we're not saying go to cash but we are saying make sure you're looking at your portfolio and seeing if this isn't a great time to prune some of the older stuff you don't necessarily love anymore to make better use of it for the future yep so number 5 turbocharged paying yourself first what do I mean by this turbo charging paying yourself versus we tell you we want you to have a cash management plan where every month you were investing to grow your investments for the future well a lot of us are now working from home our daily our monthly expenses are down right now well now look there's a lot of people that are hurting short hospitality industry and other things that not necessarily talking them but I'm talking about there are people there they're their expenses have gone down they've got this situation where they're trying to figure out what should I be doing behaviorally or financially to maximize I'm telling you even for myself I was on a pay down my mortgage as fast as I could I'm in my late 40s I want to be debt-free by I'm in my early 50s completely and that mortgage is the only debt I have so I was hyper accelerating whatever hanging down I recognized valuations of the financial markets are way down this is that once every few in a few years bear market that comes our way once a decade so I have once again repositioned where I'm no longer hyper paying down that low interest three and a half percent mortgage I'm now putting that money into my dollar cost averaging strategy so that's what I'm saying if you can look at your financial situation and you have the extra margin the extra capacity because go put it to work this is the opportunity to kind of squeeze paying yourself first to maximize what you can do for the future I want to make sure that I heard what you did say and what and they don't wanna make sure how what you did not say no you did not say hey what I recognize is there was this once-a-decade opportunity and so I went and took my three months emergency reserves or my six months emergency reserves and I went and decided to plow that into the market and get it working for me that's not what you said you also didn't say hey I recognize that interest rates are at all-time low so I went and did a cash out refinance on my mortgage I pulled the cash out and put it in a market that's not what you said you said hey I had this one strategy where I was employing dollars or for folks out there maybe your expenses are down and there's extra money left over it is accelerating your investment or taking advantage out of the margin not stealing from the foundational things that you need in place to make sure that you have yourself covered if this thing is no you're a spot-on you've got to have your emergency brakes that's your cash reserves they have a moat around them that you're not touching that you're keeping those assets safe liquid so that way you can keep your financial life out of the ditch but if you do have extra margin extra capacity is it's the whole Warren Buffett thing instead of pulling out a thimble that's right pulling out a washtub you're gonna collect as much as you can of the opportunity that's all we're saying is be opportunistic but do not put your financial life in the ditch love it number six rebalance a great opportunity I mean this is one of those things realize what happens in a declining financial market is that your equity you assets your risk on assets will get smaller they'll get beat up but you're conservative assets one more benefit to having diversification will probably stay steady if not even go up a little bit so your asset allocation might get a little out of one I mean because you're gonna have risk assets are down non risk assets are doing okay it might make sense to from time to time harvest losses and coordinate that with rebalancing so that you can make sure that you're taking advantage of this unique opportunity now we've said this before but it bears repeating rebalancing is exactly what you said tweaking around the edges to get your allocation back to what it should have been it is not completely changing your allocation if you are a 80/20 rebalancing doesn't mean I go to a hundred zero or a 6040 it's about getting back to where you should have been originally not revamping the whole strategy that's exactly right you're not reactionary front you had a sound mind plan going into it you're not reacting now love it number seven Roth conversions this is one that I think is great because while assets are down you can convert more assets that are tax deferred like your 401ks your rollover IRAs and those type of things while they're compressed the opportunity built into those assets is even more so now to convert them so that when we get recovery the tax the growth will be completely tax-free sure now hear me out on this there's a tightrope that you have to walk it's just like right now I'm sad some of my clients every year we do a Roth conversion but we have to wait for the end of the year to see do a tax projection because you've got social security considerations you've got Affordable Care Act consideration you have Medicare premiums that are considerations all these variables go into it but that doesn't mean for those especially those clients that are between 50 to 72 years of age if you know that there's a safe level of Roth conversion you can do that's not going to trigger any of those things that are income based you might want to consider it right now it's not crazy now here's the thing Roth conversion said you can have a great idea that has a lot of unintended consequences you did not realize in terms of triggering tax ability on Social Security and Medicare and all those things it's a pretty I don't want to say complicated but it's an advanced strategy if you're someone who's thinking about perpetrating that kind of strategy it might not be a horrible idea to get a second opinion reach out to a financial advisor reach out to your tax preparer ask somebody who actually understands them hey is this what makes sense for me is this something I should consider doing I want to close out this section with number 8 this is this is this is one of those finger-wagging old man on the porch moments and I don't mean to be that way but there I think it is important that we understand our behavior and what the terms mean there is a huge difference between being an investor versus a speculator oh yeah so an investor has a long term plan there they're putting assets to work out in the market that they're forgetting for the next five to seven years they have a long term mindset it's all part of a diversified plan it takes into account cash flow goals risk profile their age your liquidity all those things are built into it with a sound mind plan yep a speculator sees that this stock that maybe is in your town or it's in a sector that you love or you heard that from a brother-in-law that this stock was getting beaten up right now a speculator tries to swoop in take advantage of that super low price and then you know make a little money gamble a little bit and I'm not even against you being a speculator but with a very small percentage of your assets I really wouldn't get crazy with more than 2 to 3 percent of your investable assets in speculative actions I mean we're even I mean we do this stuff yeah literally for ourselves but it's very small if you look at our asset allocation we are practicing what we preach our long-term assets this is so funny I have a neighbor best friend that um he's like every year he calls me because he loves the individual stock boy he's like dad gummit if the S&P didn't beat it again he goes I keep your voice rings in my ears every year when I do my annual analysis and I see how good the S&P 500 did and I'm like that's because you're betting into the optimism of innovation of a growing successful economy I know that looks dark and in these hard times when markets are down but it is an ever growing pizza pod that you are buying into a slice of so take advantage of that that's why we love broad diversification not speculating him just trying to pick the next stock that you can make money off of now what happens is is when whatever getting the figure these things our mind can play tricks on us so they can convince its owner no I'm not I'm not speculating I'm just a I'm just a smart investor and I can see the trend and I can see the thing here's the gut check you can always do to figure out if what you're doing is investing or if it's speculating whatever you're going to buy or whatever allocation you're gonna have whatever gonna whatever you're going to do if you had to lock it up in a box for five to ten years and not touch it not be able to sell it not be able to look at it would you still do it I'd make the argue if your answer is oh no no I just I want to be able I want to sell it when it pops then you're speculating if you could put in a black box and not touch it for a decade that means you're probably a long-term investor thinking about it the right way yeah because you got it right on the front end so that's those are all things that you can do right now to prepare yourself or make yourself better during this financial crisis

Channel: The Money Guy Show

Views: 25,978

Keywords: money guy show, debt, budget, cash, real estate, insurance, how to make money, save, credit card, compound interest, buying house, buy stock, success, personal finance, Should You Be Dollar Cost Averaging During the Coronavirus?

Id: Z14S6Eg4vo4

Length: 15min 32sec (932 seconds)

Published: Wed Apr 01 2020