Is Now The Right Time to Invest That Cash?

When I got to the office on Monday, the market had just had an awful seven-day period that looked something like this:

The Vanguard Total Market Index was down nearly 13% in about the same amount of time it takes my four year old to find and put on his shoes, and of all Geoff’s great suggestions from last week’s brief, one had begun to stick out in my mind Monday morning: “Make a plan to put cash to work.

One of the more interesting (and common) questions in investing revolves around the most prudent way to deploy cash that you have already set aside to invest. Should it be done all at once in a lump sum? Or should you split it up over time via what’s called “dollar cost averaging”? Does it depend on when you start or what assets you’re buying as you do deploy that cash?

The title question of this blog is interesting enough when markets are going up, but when we see markets lose 13% in seven days, the question takes on even greater meaning because of two difficult-to-square realities: 1) If you’re putting the money to work anyway, buying at a 13% discount from highs is better than buying at highs! But 2) We can never know in real time whether the discount is going to go lower than 13%, and buying a 13% discount on its way to a 26% discount isn’t a great answer. It’s not like one of those deals where you get to bring in a competitor’s coupon and get the stocks at their new lows…

The historical data have a lot to say about these questions of cash deployment. In general, I think the question should be answered within the following three-part framework:

  • Lump sum generally outperforms dollar cost averaging. The reason for this is because markets tend to go up over time, and given that trend, it’s generally better to put more to work sooner than it is to split it up and put it in over time. (Again, to be clear, this is relating to an existing sum of cash you have set aside for the specific purpose of investing. Dollar cost averaging in the context of regular 401(k) contributions is different, and one of the best things you can possibly do. In fact you might think of the dollar cost averaging out of your paycheck and into your 401(k) as a series of small lump sum investments, since you put it to work as soon as you get it).
  • Lump sum is riskier than dollar cost averaging. This is true because you take all the cash you have set aside for investing and…invest it. In the dollar cost averaging option, you always have some cash out of the market and some in, which subjects you to less market volatility (which means generally less growth, see point above, which is the other side of the same coin).
  • Lump sum can underperform during down markets. If you are in the midst of a market going down, dollar cost averaging throughout the down market can outperform putting a lump sum to work. But the problem with this data is that it’s hard to use in real life. In other words, you can never know how long a down market is going to last while you are going through it, and to continue buying on the way down might prove psychologically more difficult than you imagine.

What I take from all of that in general is this: If you have cash set aside for investing, invest it. All at once in a lump sum. The second best (but still good!) answer performance-wise is, pick a time period (no longer than three years) and commit to dollar cost averaging into the market no matter what. Those are, I think, the only two good answers. The answer I don’t like (and I don’t think the data like it either) is sitting on a pile of cash, waiting for “the right time” to put it in. It may be the closest thing to a guarantee in capital markets investing that that answer will cost you meaningful performance almost every time you choose it.

So back to the question of today, of the craziness of this moment, with the market barely up on the week, but still all over the place (as of end of day Thursday). Howard Marks of Oaktree Capital writes memos that, while I don’t always agree with their content, are still worth reading, and he had this to say a couple of days ago: “These days, people have been asking me whether this is the time to buy. My answer is more nuanced: it’s probably a time to buy.”

I don’t think I can do better than that. No, right now is not the time to buy, because that time doesn’t exist. But now, like anytime, is a time to buy, and if you’ve been waiting to deploy cash, my counsel regardless of what the market does from here would be stop waiting. Waiting is not a strategy. Choose either to invest cash right when it becomes available, or define an explicit strategy to deploy it over a relatively short amount of time through dollar cost averaging. Anything other than that is not likely to be looked back upon with fondness.

 

Author Jared Korver, CPA, CFP®

A product of small-town North Carolina (Carthage, to be exact), I’m proudly married to my best friend and co-adventurer, Amy. Together, we have two boys named Miles and Charlie, and could more or less start a library from our home. I love being outside, can’t read enough, am in the habit of writing haikus, and find food and coffee to be among life's greatest treasures.

More posts by Jared Korver, CPA, CFP®

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