By Tom Bradley

I recently re-read a 2004 article from Bernstein Global Wealth Management entitled Taking the Fear out of Entering Equities.  It did an excellent job of addressing the issue of whether dollar-cost averaging is the best way to invest new money.  It’s an appropriate topic to revisit given the weak markets we’ve been experiencing and the economic uncertainty that’s staring us in the face.  The most common question we are hearing these days relates to just that – “I have some money to invest.  Is now a good time?  How would you suggest I do it?” 

Our answers are “Yes, it’s a great time” and “It depends”.  Our reasoning behind the first answer has been well documented on this blog, including a recent posting entitled Amid the Doom and Gloom, it’s Time to Hatch a Strategy for Better Times.  As for the second question, the Bernstein paper does an excellent job of explaining our answer.

Their research is based on data from 691 12-month periods, running from 1946 to 2004.  In 77% of those periods, the S&P 500 returns were positive and in almost half the cases (35%) the market was up over 20%.  On the other side of the ledger, the 12-month return was negative 23% of the time and the market was down more than 20% in 3% of the periods. 

Given those numbers, it’s not surprising that the strategy of putting all the money to work right away is the best way to go, if your time frame is long and risk tolerance is high.  Based on 60 years of data, your expected return over the subsequent 12 months is higher. 

But with a higher expected return comes a wider range of potential outcomes, including the possibility of larger initial losses.  So the answer as to which strategy is the best one depends on what your situation is.  For an investor with a 20+ year time horizon and an equity orientation, the answer is easy.  For someone who inherited money with a history attached (a parents’ legacy perhaps), sold a home or business, or will be drawing on the portfolio right away, a slower investment period makes more sense. 

For those who are interested in this topic, and/or are faced with the issue right now, I recommend you give the Bernstein paper a read.  It will be 15 minutes well spent.