By Ben Esget
One of the more difficult things investors deal with is timing their investments.
Perhaps you just funded your IRA or are sitting on some extra cash and you’re ready to invest funds. But you look at the strong returns that stocks have already experienced since the great recession, pushing the Dow Jones Industrial Index to new highs, and wonder if now is a good time or should you wait for a market correction.
Historically, buying during a period of new highs has led to better performance one year out, rather than waiting for a correction.
Going back to 1791, the stock market has returned an extra 1.2 percent in the 12 months following a new high than it does during average periods, according to Mebane Faber Research, and 4.4 percent greater than it has when the market is reaching new lows.
I remember discussions with my professors during graduate school on stock market valuations in the early 1990s. One professor told me that he felt stocks were expensive in 1992, but then was shocked as the market streaked to new highs over the following eight years, never to return to 1992 valuation levels.
Investing means taking risks. Taking risks is always scary, and it’s easy to second-guess the timing or whether you should even take the risk at all. But history has shown that investing in a market that is reaching new highs has been a good move.
I will be the first person to concede we live in strange economic times and an era of incredible government intervention. Thus, if you are comfortable with the risk associated with stocks and similar risk assets, I would recommend the tried and true method of dollar-cost averaging as the market reaches new highs, perhaps over a period of six months to one year.
For those who are not familiar with the term, dollar-cost averaging is the act of investing small, equal portions over time.
By dollar-cost averaging, you can alleviate some of the timing risk without missing the ride if the Dow continues to climb.
Of course, all investing should match your goals and needs, and you should discuss your strategy, allocation and timing with your investment adviser.
Ben Esget is the president of WealthMark LLC, an investment firm in Bellingham. He writes occasional columns for BBJToday.com. Esget also runs the finance blog Outsider-Trading.com, in an effort to level the playing field between Wall Street and Main Street. Contact him at 360-734-1323 or email@example.com.
Author’s note: The information in this column should not be construed as investment advice. Everyone’s goals and investment portfolios are unique. Please contact a financial adviser or an accountant for your particular needs.