Despite the slew of investing master plans that many stock-pickers may peddle, there remains one time-tested strategy that has yet to fail: dollar-cost averaging (DCA). As this year’s bear market continues to sharpen its thorns, dollar cost averaging is one of the only nigh-guaranteed long-term winning investing strategies.
So, what is dollar-cost averaging?
DCA refers to a passive investing strategy that consists of buying a set amount of S&P 500 index funds or exchange-traded funds (ETF) at the same time, every month. Because the strategy entails buying on a consistent investing schedule, many of the variables involved in traditional investing are eschewed. Has the market soared in the past month? Cool, buy. Have stocks been in free fall all week? Cool, buy. DCA takes much of the leg work out of investing while offering a stronger return on investment than many gurus.
As the 2022 bear market rages on, a growing number of Americans are looking for ways to guarantee growth in their portfolios. Reasonably so, being a stock picker in a down year often feels like scratching lottery tickets. Some of last year’s biggest winners are 2022’s most brutal casualties, few companies are doing notably better, and everyone is under the stress of a high-interest rate investing environment.
Fortunately, the history of DCA is the history of wealth creation over time. Despite all the fears swirling around the markets these days, DCA is still the king of long-term returns.
Take it from the Oracle of Omaha himself, Warren Buffet. “If you like spending six to eight hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds,” Buffet said.
Betting on the S&P 500 Is Always Profitable in the Long-Run
DCA’s strength as an investing strategy is largely a testament to the S&P 500. The simple fact is that no one who has left money in the S&P for 20 years or longer has ever lost money.
The index measures the performance of the top 500 publicly-traded U.S. companies. While there will always be some big winners and losers within the S&P in any given year, over time everything regresses back to the average. And on average, the S&P handily outperforms most stock-picking mutual funds and mastermind investors and entails minimal risk.
The historical average yearly return of the S&P over the past 100 years is 10.265%, as of September. While this isn’t adjusted for inflation, and assumes reinvested dividends, it’s still a notably healthy return. For context, if you invested $5,000 annually and experienced an 8% yearly return, after 40 years your account would be worth $1.4 million. If you invested $10,000 a year and your account grew at 10% annually, after 40 years you’d have earned roughly $5 million.
Make no mistake, DCA creates millionaires. Maybe not overnight, nor a month, but over the course of years. As far as insurance goes, DCA is the strongest guarantee Wall Street offers.
There’s Never Been a Better Time to Jump into Dollar-Cost Averaging
2022 has been an undeniably poor year for equity markets. The S&P 500 is down almost 22% year-to-date, a bona fide bear market. While on the surface it may seem like an unattractive time to put money into the markets, the beauty of DCA is that it’s never a bad time to invest. And in fact, when things are down, it really just gives investments more runway to grow.
The S&P climbed nearly 27% in 2021. While this year has wiped much of last year’s gains off the table, it has, in a sense, granted investors another chance to reclaim lost ground. In its long history, the S&P has always broken through its previous peak eventually, always. With the markets down substantially from its December. 2021 high, really just guarantees a stronger and quicker return on investment. This highlights another, less-appreciated aspect of DCA: flexibility.
Investors from Capitol Hill to the Golden Gate Bridge have touted DCA’s merits, but many have their own unique spin on the strategy. For example, Steve Burns, trader and founder of NewTraderU has his own set of rules for DCA, that determine whether to buy, sell or hold S&P 500 ETFs based on whether the index is above or below its 200-day moving average at the end of each month. Others prefer diversifying their selection of index funds to focus on small-cap or large-cap stocks, which offer similar exposure but potentially higher growth/stability. Others still may opt to invest in the more tech-heavy Nasdaq Composite index.
DCA can be as dynamic or static as you’d prefer. It’s certainly possible to optimize the strategy for your specific investing goals.
How to Start Dollar-Cost Averaging?
In 2022, investing in the S&P is as easy as buying stocks. While you can pursue more traditional index funds via your stock broker of choice, ETFs are likely a more convenient option.
All S&P index funds and ETFs track the S&P 500, meaning they make identical changes to their holdings as companies enter and exit the list. Unfortunately, not all index funds are created equal. Some funds may contain an expense charge and/or sales load on your investment. Now, index funds tend to have very low expense ratios, and sales loads really only apply to actively managed mutual funds. However, paying more money for the same product never makes sense. Additionally, index funds frequently have minimum investment amounts, sometimes as high as tens of thousands of dollars.
S&P ETFs are, for most investors, the easiest way to go about dollar-cost averaging. ETFs are more tax efficient than mutual funds, usually have rock-bottom expense ratios if they have expense fees at all, and often allow investors to buy fractional shares for just dollars. S&P ETFs function identically to index funds, but with the convenience of stocks, truly a win-win.
Some well-known, low-expense S&P-tracking funds include SPDR S&P ETF Trust (NYSEARCA:SPY), Vanguard S&P 500 ETF (NYSEARCA:VOO), and iShares Core S&P 500 ETF (NYSEARCA:IVV). These all have expense ratios of less than 0.1%, meaning that for every $10,000 invested, would cost less than $10 annually.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.