One of the odd things about being a financial specialist is that I have a lot more conviction in my long-term expectations than in my short-term ones. People have a hard time understanding this, because it runs counter to the way life works. Where will you be tomorrow at noon? You probably have a good idea. How about on June 6, 2013? You probably have no idea whatsoever.
When it comes to the stock market, though, I’m much more comfortable predicting that the market will be higher 10 years from now, say, than I would be saying the market will be higher tomorrow. What about market peaks and troughs? No one can pinpoint market bottoms or market tops. Lately, a lot of investors are asking whether now—meaning today or tomorrow—is a good time to buy. What they often mean is: if I invest in stocks now, will they go straight up from here without falling? I don’t know and neither does anyone else.
Investors need to adjust their thinking. A more realistic and helpful question is: Given today’s tremendous uncertainty and immense volatility, what’s the best way to make sure you don’t invest a lot of money at a horrible time? The answer, in my opinion, is a practice called dollar-cost averaging. With dollar-cost averaging, an investor commits to buying a specific dollar amount of an asset (stocks, bonds, etc.) at regular intervals, usually monthly, whether that asset goes up or down in value. It’s actually the way most people invest: in a 401(k) or 403(b) retirement plan, a portion of each paycheck gets put to work. Dollar-cost averaging into a stock or stock mutual fund means you will automatically buy more shares when the price is low than you do when the price is high. And that’s what you want to do.