Ask The Expert: The Dow's Over 14,000, But Is It Time To Invest?
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Question: Hello. I sat on the sidelines after thetook its plunge in 2008. Now I'm seeing the above 14,000, which is much better than a few years ago. Have I missed the boat? Or should I start investing? Paul, Austin
TheAnswer: The market has been doing very well lately. Just a few days ago, the Dow Jones Industrial Average racked up 10 straight days of (and 10 straight days of hitting new all-time highs).
For the record, that's the longest winning streak since 1996 (when the economy was booming) and the first time we've seen the Dow over 14,000 since late 2007. The Dow isn't the only index -- the S&P 500 has been just points away from hitting its all-time high, too.
So, is it time to stay on the sidelines? Or is it time to invest?
I'd say a little of both. Let me explain why.
I'm not going to pretend I know what the market analysts from Goldman Sachs, CNBC and others who make good arguments why the market is "doomed" or ready to take off.do next. There are plenty of very intelligent
But regardless of what any of them say, it's most important to know this: The biggest mistake in investing, especially toward retirement, is to not invest at all.
Case in point: The S&P 500 index reached 500 points in March 1995 (an all-time high), but if you took your money out of the market or stopped investing after that point, you'd have missed out on some great future ; the S&P 500 gained 200% and almost passed the 1,500 mark just five years later.
If you're unsure of where the market is going next, minimize your risk by slowly investing a fixed portion of your money into the market every month or quarter -- using the dollar cost averaging (DCA) investing method.
That way, rather than attempting to time the market as it moves over the next few months, you're buying somewhen the market is low and you're buying some when the market is high.
Here's how dollar cost averaging works. Let's say I have $12,000 ETF that tracks the S&P 500 index. Let's assume the ETF currently trades for $100 per share.sitting in a money market account and I want to start investing. Because I want to invest a little at a time, I invest $1,000 each month for the next 12 months into an
Each month, I'll keep investing my $1,000, buying year. Let's say in the first month, of the ETF cost $100 each, so my $1,000 buy 10 . Then let's say in the second month, the ETF falls in value and cost $80 each, so my $1,000 can buy 12.5 this time because they're cheaper.of that ETF even as it changes price over the
You can see how thisplay out in the table below.
As you can see, my $12,000 investment spread out over the months of the year allowed me to buy 134.7 of the ETF, and I paid an average price of around $89 per share.
So why does that matter?simply, this can magnify your returns if the investment rises in value. For example, if I had invested $12,000 all at once at the beginning of the year, I'd have paid the first month's $100 per share price. If the ETF's share price rises to $200, I'd make a of $100 per share for a 100% .
By the way, if I had decided not to invest at all, I'd have missed out on all those...
Here's the takeaway. If you're automatically investing each month in a 401(k) plan, you're already using dollar cost averaging, so just keep investing in the plan.
If you're investing outside of a 401(k) plan in an funds, and if the market goes up, you can be glad that you had money in the market. It's a win-win., or other investment account, you may practice DCA by investing a little money at a time into the market. If the market goes down (i.e. becomes cheaper) your money buy more of or mutual