Defense can be costly

All investors love the prospect of a rising stock market; however, once the trend starts downward and prices approach historical lows, many investors feel the need to be defensive and retreat to the security of cash or money market instruments. While no one likes a turbulent market, those investors who can focus on the long term and stay invested – as the chart demonstrates – stand to gain.

For example, an investor who stayed fully invested in the S&P 500 Composite Index from January 1, 1990 to December 31, 2018 realized a 7.0% annual return (excluding dividends). Conversely, an investor who missed the 50 best days of the S&P 500 over that time period (1% of the trading days) realized a -1.3% annual compound return (excluding dividends).

Profit with dollar cost averaging

The concept of “buy low and sell high” sounds attractive, but it can be difficult to follow due to the unpredictable nature of short-term market prices. To take advantage of these changing prices, one of the simplest yet most effective investment strategies you can use is known as dollar cost averaging.

By making a commitment to investing a smaller amount on a regular schedule—like $100 a month for six months, as opposed to a one-time investment of $600—dollar cost averaging can help you lower your average cost by purchasing a larger number of investment units at lower prices, and fewer units on higher prices. This strategy can also help you manage market volatility that your portfolio may experience.