Lump Sum...
There can be a myriad of reasons that half or more of Americans avoid participating in a retirement investment program. Many may have a perception that the process is akin to placing a one time bet, and then you either win or lose on the bet. While this can be true for short term traders or those who avoid diversification by trying to pick individual market winners, for the average individual, the process of retirement investing should be just that - an ongoing process. Some may perceive the activity of investing to be what is often called lump sum investing. With a lump sum approach, an investor will take a large amount of their capital, perhaps all their investable funds, and allocate it all at once to an investment. This can be a scary prospect for those who perceive this as placing a bet that will either make money or lose money.

Recurring Contributions
While lump sum investing may be appropriate for those who receive a sudden or perhaps unexpected windfall of investable cash, for the average person, investing will more likely involve contributing portions of their paychecks on a regular ongoing basis. Many people simply won’t have a large sum of investable assets to allocate all at once to a retirement investment account. A common recommendation is to allocate as close to 15% of gross, before-tax income to a retirement investment account. This can be easily achieved through automated paycheck deductions that happen perhaps weekly or monthly based on a pay schedule. For those who are self-employed, it may be more difficult to estimate how much the total income for a given year will be. However, it may be advisable to still try and make recurring contributions based on the expectations as frequently as possible throughout the year, and then contributing the remainder of investable funds at fiscal year end once the tally is complete.

Dollar Averaging
Not only are recurring contributions from portions of paycheck a practical way of allocating investable funds, it can also be a sound investment strategy. The more frequent allocations are made, the less likely it is that an investment purchase will be made at a peak. A stock market peak refers to a high level of price before a downturn. Buying at a peak can be discouraging and frustrating, especially if there is no plan to make more allocations any time soon. The investor will have to wait for the market to recover for their lump sum allocation to return to a break even level. However, if more frequent allocations are made, the investor can view downturns as desirable buying opportunities. Through a process often called dollar cost averaging, making frequent investment contributions, even during downturns, allows an investor to make purchases at lower prices, which will be beneficial as markets recover. Contributing a similar amount on a regular basis can result in more shares being purchased when prices are lower, and less purchased when prices are higher.

Buckle Up…
Making recurring allocations on a regular basis requires an investor to stick with a plan, even during turbulent or uncertain market conditions. For the strategy to be most effective, investors should disregard the notion that there are good times or bad times to enter the market. Ups and downs are inevitable as investors constantly adjust their outlook based on incoming economic developments. However, time is the investor’s best friend and can allow for markets to recover from slumps. It is extremely difficult, even for experienced market practitioners to time the ups and downs of the market with any amount of consistency. Waiting to get in the market may simply result in lost opportunity. Perhaps the best strategy for the average retirement investor is to get started now, buckle up, stay strapped in and avoid hitting eject no matter what happens.

July 3, 2024