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Dollar cost averaging: opportunity amidst uncertainty
During periods of uncertainty and increased market volatility, investors can easily lose sight of their long-term financial goals or even fall into the trap of trying to time the ups and downs of the market. But keep in mind, in order to be a successful market timer you need to get it right twice — when to exit and again when to re-enter the market.
Since 2000, there have been three bear markets. During each overall market drop, multiple up-market periods add to the complexity of trying to time your actions.
Dollar cost averaging is a disciplined investment plan that results in buying more shares when prices are low and fewer shares when prices are high. This may help:
- Reduce the emotion created by market volatility
- Avoid the traps of market timing
- Help achieve financial goals
As markets move lower, it’s natural to want to sell out of stocks and buy bonds. But remember, historically stocks have tended to provide higher returns.
Investors that stick to a systematic investing plan, like dollar cost averaging, may actually take advantage of stock market downturns to enhance investment return over the long-term.
Consider the example below:
- Investor A invests $500 every month into U.S. stocks, while Investor B puts $500 every month into U.S. bonds since the beginning of the century (01 Jan 2000 through 31 Dec 2020)
- This period includes three bear markets (technology bubble, financial crisis, COVID-19 health crisis) since 2000
- During this 20 year period, U.S. stocks (+6.61%) slightly outperform U.S. bonds (+5.15%) on an annualized basis
- Yet, Investor A accumulated 106% more wealth by benefitting from short-term volatility to buy more shares of stocks when prices were lower
Note: U.S. stocks are represented by the S&P 500® Index and U.S. bonds are represented by the Bloomberg US Aggregated Bond Index. Total returns include reinvested income and dividends.
S&P 500® Index (S&P 500) is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Performance does not reflect the impact of fees and expenses. Investors cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
Bloomberg US Aggregate Bond Index, or the Agg, is a broad base, market capitalizationweightedbond market index representing intermediate term investment grade bonds traded in theUnited States. Investors frequently use the index as a stand-in for measuring the performance of theU.S. bond market.
A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is noassurance that an investment will provide positive performance over any period of time. Nuveen providesinvestment advisory solutions through its investment specialists.