By Craig Erwin, Ph.D.
Even though it has been bouncing back the past couple of weeks, the NASDAQ (the world’s second largest stock exchange) is down 23.2% year to date. A headline in today’s Wall Street Journal asks, “Are stocks undervalued yet?” This suggests that it might be wise to consider market timing, trying to determine the best times to get in and out of the stock market. But if you dollar-cost average, it doesn’t matter if stocks are undervalued. And for nearly all of us, dollar-cost averaging is a better investing approach than market timing.
I have a friend who used to try to determine if stocks were overvalued or undervalued month after month, year after year. He used mathematical models to analyze the stock market so he could know whether he should be in the market or not. But no matter how many analyses he ran, he always came to the same conclusion, stocks were overvalued. So he stayed on the sidelines year after year because stocks were overvalued. He was hoping something would change so he could buy stocks cheap. What kind of return did he earn on his money? None. He just sat in cash, waiting for bargains that never arrived.
Although I have tried to time the market, sometimes successfully and sometimes not, I no longer do it; it’s too hard to do it well, so you tend to be wrong a lot. Besides, I have learned that, if I dollar-cost average, there is no need to time the market. With dollar-cost averaging, I don’t have to worry about whether I am right or wrong because there is no right or wrong. Once you start, you never need to make another decision. You just start saving and investing and keep on doing it forever. You will pay more for stocks sometimes and less at other times, but on average you will pay a fair price. To get started, sign up for your employer’s retirement savings plan and have a portion of every paycheck invested in a stock index fund. Then just keep doing it, month after month, year after year.
There are very sound reasons not to try to time the market and very sound reasons to dollar-cost average instead. If you are trying to time the market in 2022, you may be paralyzed, unsure if the market has bottomed or if it has much further to fall. In contrast, if you are dollar-cost averaging, given the stock market’s tumble this year, you are paying much less now for the stocks you’re buying than you were at the beginning of the year. Who knew you were such a savvy investor?
Do you have a retirement savings plan that will enable you to meet your goals? Have you tried to time the market?
For more information on market timing and dollar-cost averaging, click on the following links: