People make financial decisions for a plethora of reasons. While we may understand that it makes more sense, financially, to invest extra cash in the market, sometimes pulling the trigger on a lump sum can lead to anxiety and regret.
So how can you feel better about making that investment? Using a strategy called dollar cost averaging (DCA). Let’s say you have $10k in cash and want to invest but you’re feeling skittish based on the current state of the market. Mathematically, it makes the most sense to go ahead and put all that money right into a low cost index fund but math doesn’t help everyone sleep at night. If you know that watching the market will create stress for you, you can invest that $10k at $1k per month over the next year.
What are the pros to this strategy? First, if you put $1k in and the market goes up, you make money and you are happy. If it goes down, you now get to invest the next $1k while the market is on sale (i.e. the cost is down). It is a win-win, emotionally.
The best way to ensure your financial future is to make sound decisions that feel good. Listen to this week’s podcast to learn more about DCA and whether it is right for your portfolio management.
[00:00:00.250] - Mike
Welcome to Financial Life Planning. That's right. It's the Mike Morton Podcast, also broadcast on WKXL and available wherever you get your podcast. I'm your host Matt Robinson with my perennial guest Mike Morton of Morton Financial Advice and also the host of the Mike Morton Podcast. Mike, this is like a continual home and home. Like, one week you go to one person's arena, then you come back to your home arena.
[00:00:29.230] - Mike
Yeah, I like Ping pong the hosting duties back and forth. Yeah, you're the host. But I want to be the host. Yeah, it is like Ping ponging back and forth. Wait, who's hosting whom today? Maybe it's Riverside hosting both of us on where we're recording today.
[00:00:40.410] - Matt
Yeah. Regardless, remember, it just wherever you go, there you are. You want to talk about a term? We're going to turn off, like, half our audience because we're going to introduce a term that sounds too sophisticated. I don't know what it means, and I studied economics in college. But you're going to explain it and why it's useful to us. Dollar cost averaging, Mike. What's that?
[00:01:00.360] - Mike
Dollar cost averaging is DCA. Matt, come on, man, keep up with the times. Dollar cost averaging.
[00:01:07.430] - Matt
Isn't that the Washington, DC. Airport?
[00:01:10.240] - Mike
[00:01:11.340] - Matt
[00:01:11.670] - Mike
That's Reagan National now, isn't it?
[00:01:13.270] - Matt
I'll never get over the Reagan part of that. You need that. All right, so dollar cost averaging. Why do we need to know that.
[00:01:22.170] - Mike
Let's define the term first. But you don't really need to know that the concept is dollar cost averaging. You're averaging your dollars over time into something. In this case, we're talking about investments. So if you have some money, say you have $1,000, do you lump sum put that all into the stock market today, or do you put it in a little bit of a to time over six months or a year? And that would be your dollar cost averaging because you're averaging every month you're buying at a slightly different price, and so you get the average of all those prices. So that's where the term comes from. But don't worry about the term. Today's topic is should you, if you have some money, $10,000 that you would like to get invested in the market? Should you put it all in today lump sum? Just pop it in there. Buy Vanguard Total Stock Market Index Fund. Or should you split it into ten $1,000 chunks and do it monthly every month? I put in $1,000. Which one should you do? And that's today's topic.
[00:02:32.150] - Matt
That's interesting. The idea wouldn't have even occurred to me.
[00:02:36.980] - Mike
That's what's weird.
[00:02:37.660] - Matt
It's first of all, if I have a chunk of money, I'm probably going to spend it on riotous living. Beyond that, the idea of yeah, you know.
[00:02:45.030] - Mike
Yeah, I know you.
[00:02:45.800] - Matt
Yeah, you know that.
[00:02:46.800] - Mike
[00:02:47.610] - Matt
Yeah. It's crazy time. I might stay up till 1030.
[00:02:51.580] - Mike
Oh, man. I don't know.
[00:02:52.660] - Matt
It's like that line from Old school with Will Ferrell we're going to go to Home Depot. Maybe Bed Bath and Beyond. I don't know if we'll have the time. It's a pretty good little Saturday. That's pretty much how I live. All right. Why would you even consider the idea? Again, this hadn't even occurred to me. What are the upsides of maybe parceling in your buy into the stock market a little bit at a time?
[00:03:13.040] - Mike
Oh, yeah. I love it. You never even thought about this. So if you had $10,000, Matt, if you had $10,000 to invest in the stock market, what would you do? Just pop it in there.
[00:03:23.570] - Matt
Right, I would, but for a specific reason. And maybe this is a heuristic. I've just been so schooled in the idea of what you want to do is get into the market and hold and take a long term view. So I guess my idea of it would be I'm not going to be that sensitive to six month price fluctuations, or I could get a better price tomorrow because it's all not going to matter that much in 40 years. Of course, at this point, now that I'm middle aged, we're really talking 20 years, I got to adjust my time horizon a little bit. The answer is, I would probably just dump it all in.
[00:04:08.640] - Mike
All right, so you got that at the first of the year in 2022, and you popped it all in there and you're down 20%. Doesn't bother you, right? Right now, I mean, we're down sorry, we're down 20%. If you're listening to podcasts, obviously I'm asking Matt if you put it at the start of this year, the the stock market is down 20%. So now it's $8,000. But that wouldn't bother you because you have a 20 year time horizon.
[00:04:30.730] - Matt
Well, also, I'm a Masochist, so I would be like, ohhh, I'm going to do some tax loss harvesting. Yeah, no, I think I would probably take the Zenlike Mike Morton School of Thought approach and say, you know what? I'm not even looking at it. I'm just sailing on.
[00:04:49.900] - Mike
Right. So everyone, Matt actually is a robot, all right? He doesn't have emotions. He just does mathematically, what is the optimal answer? And Matt. Congratulations. I'd like to hand you a prize. You did the mathematically optimal solution, which is you take your $10,000 and you put it into the market today for the reason you spectacular.
[00:05:11.830] - Matt
This is great, because first of all, I didn't know what we were talking about today. Second of all, you gave me a pop quiz about it. I gave you an answer with absolutely no thought behind it, and you're like, you're brilliant, and also maybe a robot degree, but the next time we get together for human food, I want to talk about this further. All right, go on.
[00:05:30.120] - Mike
We'll talk about it. Right now.
[00:05:31.950] - Mike
I blunder into all of my good decisions. This is how I met my wife. Hey, do you want to get married to this woman? Yes, I do. She seems fantastic. All right. That’s the optimal answer. But for some people there is a case to be made for not doing it.
[00:05:45.460] - Matt
Yeah. Oh, trust me, there's a big case to be made for doing the opposite. But let me say, actually a couple of other points that kind of struck me, Matt, when you said that having that 20 or 40 year time horizon is a really interesting way of thinking about things. And again, that's really an optimal way when it comes to the market and the stock market and investing. And humans have all different ways it's fascinating. We have all different windows of time windows for our thought process. Okay? Some people only think a month or a few months in advance, and so they're very susceptible to all kinds of things. In that case, other people do get ten year and twenty year time horizons. And if you look at the research, the longer you're thinking time horizon, the happier you'll be and the better investor that you'll be. Okay? So that's an aside for some other podcast. It's very interesting how we think in different time horizons. All right? But for today, let's get back to today's topic. So Matt is the robot. He did the optimal mathematical solution, and the reason it's optimal is because two thirds of the time, the stock market goes up, right? And so get your money working earlier. And if you look back at history, since obviously two thirds of the time it goes up, you're better off getting it in there. You know, two thirds of the time, you'll make more money. Some robots. Except for Matt. So lots of times we have regret, right? We put in that $10,000, and three months later, it's only worth $8,000. And we just don't feel good about that. And many people have a hard time sticking with the investing if that happens. Oh, my gosh, I feel terrible. I'm checking every day, every week. It's gone down. It's not going back up. The stock market's rigged. Like, I'm out of here. And then you really have a bad experience. You never revisit it. Now you're out of the market forever. And that's just not really a good place to be. So the other way of thinking about it is the dollar cost averaging, and that is really a regret minimizing solution to this problem.
[00:07:46.390] - Matt
The way I would think about it mathematically now that you've actually forced me to think about this topic, is it's sort of a way of hedging, right? You're basically, if you string out your purchases over six months, let's say you're getting the average of those prices and you're hedging it's like the same way that you diversify your portfolio and it could go up, it could go down a little bit. Protecting against your downside risk, you're also lessening your upside potential, but by getting that average price, it's a little bit less volatility, a little bit less beta. Did I say anything, like, insanely wrong a moment ago?
[00:08:24.190] - Mike
I don't know about the word beta. You just threw that in there to make sense.
[00:08:27.730] - Matt
I did, I know every letters of the Greek alphabet.
[00:08:30.200] - Mike
Just say it. All right, good work. Sneak in a few more of them during this podcast.
[00:08:34.770] - Matt
Sounds like a real omega thing of you to say, dude.
[00:08:38.230] - Mike
Oh, my goodness. Yes. But the reason why you are limiting your upside potentially, again, two thirds of the time it goes up. So if you don't put it all in today, two thirds of the time you would have wished you did. Right. But again, if we're doing it over six months and we'll talk about what time frame would you consider putting money in over time? Is it six months? Twelve months? Five years? If you do it over six months in a ten or 20 year time window, it's not going to make any difference at all. Right. So you're not really limiting your upside in that case. What I really want listeners to do is recognize I get that $10,000 in the market and I want it to stay there. Okay, and so what's the best way for me to convince you to get it to stay there is, again, if you do it all at once and it goes down, I'm concerned you might not right. You might bail out. Here's the other reason. That how I explain it. If we put in $5,000 now and the market goes up, we feel good. We just made money. This is great. I'm ready to put in the other $5,000. I feel really good. Okay. And I put in the other $5000. If we put in $5000 today and the market goes down, well, that's good. I get to put in more money at a lower price point. I feel good that I kept $5000 on the sidelines that I can buy at a cheaper price, so I feel good. So you notice, Matt, no matter what happens in the market, I get to feel good. And since I'm a human with emotions, I want you to feel good about investing, so that you stick with it for the long run. And that's often why I average in over a little bit of time.Matt:
You're tricking us, Mike, because what you're really doing is what you're saying you already gave the right answer mathematically, which is do it all at once, do it now. But what you're doing is you want to help us psychologically trick ourselves to feel good. Either way, you know What's so weird about this? Is that my robot answer from five minutes ago, I definitely would do that. I don't think I'm just making that up. I really think if I had a chunk of money, I would just invest it all now. But if I really examined my psychological reasoning, there are two things since this is now all about psychology, because we know the math answer, there are two things that stand out to me. One is, I think, in part, I would put it all in now, not because I'm some kind of an evil genius. But because I'm fundamentally lazy, I don't think I have the discipline to remember, in a month, I'm gonna invest another $1000, or in a quarter or in two weeks, I want to just get the task done. And that relates to my second observation, which is and astute longtime listeners to the show, know that we've talked about, if you have loans, especially student loan debt hanging over your head, it is quite possible to essentially arbitrage if you have a loan, if you have a debt that you're paying off at a certain rate, but you can earn more on an investment, then mathematically, it's better for you to maintain the debt, and the investment, don't use your available cash to pay off the debt, keep it invested, you're making more money that way. But I don't do that, even though that's the math rational thing to do. If I have the available money, I tend to like to pay off the debt, because I don't want it hailing over me, I if I can't, if I can wipe if I can wipe something off the books, not like a huge debt, not in my house and not leave or had the available cash to wipe out like my mortgage. If I have, this actually happened to me in my life, I had something like $20,000 remaining student loan debt. And I just wanted to wipe it out because I didn't want to deal with the grind of continuing to pay and having an hanging over my head. Anyway, all of which goes back to what you're focused on is not the optimal math outcome, but the optimal psychological outcome.Mike:
Well, I like my clients to feel good. You know, so we'd start there. But let me come in on a couple things. The automation, yes, is very critical to this. So I also do not want you to have to remember, oh, yeah, I gotta do another $1000 this month, and another $1000 next month now suddenly sounds like a job and a task. And this is terrible. But in that case, like I love your answer, Matt, yeah, just do it all at once. So it's off the books, I don't want to think about it. That's another reason to go ahead and just do a lump sum, you can automate these things. So that's another great way of doing it. Mutual funds in particular are set up this way we've talked about I'm not a big fan of mutual funds, I prefer the ETFs. But mutual funds, you can put in, you know, set like, hey, $1,000 a month, for the next six months goes from my checking account into this brokerage account automatically goes into this mutual fund. So you could set that up. So it's set it and forget it on your student loans that is that's already set up, you know, like you pay it you set up to pay them every month. What do you know, hopefully, you don't have that, knowing it's annoying. Yeah. So I'll comment on that. So I know a lot of stories from financial advisors, and financial community where they have paid off their mortgage. They know and this is that 3% mortgage, wow, four wow, mortgage. And they know, mathematically this is terrible. This is like a dumb thing to do. Because they do this every day. They've been doing it for decades, you know, examples, and they still pay it off because of exactly what you said, I just don't want to have that hanging over me. I don't want to have debt. And this is the whole like Dave Ramsey, and, you know, advice out there about pay down debt, right? Get out of debt. And I'm not arguing with that. If it makes you feel really good. If the debt is psychologically dragging you down, and you have the ability, you know, maybe it's a $10,000 student loan, that you can just wipe out and feel really good. I'm in favor of that. I'll tell you the pros and cons. I do this with my clients like here's the pros and cons of the mortgage and this and that, listen, it's not going to you know, if there's not something I can see that will come and wipe you out financially and say like this is just not a good idea for X, Y or Z. Then yeah, pay it off and feel really good about not having that debt and being debt free.Matt:
It's just it's interesting to me because we talked about the way you named your show financial life planning, because only half your job is financial It's like the horse whisperer. It's, you know, you whispered horses, but you're not really solving horse problems. You're solving people's problems. And you're not really you're doing financial planning, but you're really doing sort of the overall, how happy are you with all of this? And I guess that's an interesting aspect of this. So you're saying that people who are in your line of work, actually do the non-mathematically optimal thing, because they're doing the happy happiness optimal thing. And that's cool. And you reach that same point with your clients as well.Mike:
I mean, no one ever woke up in a cold sweat, and was like, I need a comprehensive financial plan. It doesn't tend to happen that people have like human problems, like, I have a lot of debt, and I'm not sleeping well at night, and I have a lot of cash sitting around, I know I need to invest it somehow. I'm not sure what to do with it, I need some help figuring that out. So their financial problems, quote, unquote, but why? Matt you know this better than anybody, like why do people make decisions? How do you make a decision? You know, it's all about how it makes you feel? Are you ready to create your ideal lifestyle? Let's discover what's most important to you and design a plan to have more of that in your life? Go to meet Mike morton.com. All one word, meet Mike morton.com.Matt:
That's look, this is the old joke about why people go to therapists, right? It's to tell them what they already knew. And they were finding it too hard to do. And this is why on the rare occasions where people think it's a good idea to come to me for advice, which I assure you right now, you shouldn't I hate giving advice, because it's a form of social abuse. It really is. It's your opportunity, I just established with the whole Greek letter thing that like I do, like being a know it all. But what you're basically doing is Hardy Har from outside your situation, I know what the right thing is to do. And I'm going to tell you what the right thing is to do. And what's worse is, you know what the right thing to do is already, but for good and sufficient reasons, you don't want to do it. And so you're coming to me for a psychological out, I'm not going to provide you one, I'm going to rub it in your face by telling you the right thing to do. I hate it. I hate being in that position, because then people don't follow your advice. And then inevitably, they regret it. And then they resent you. This is your entire lab work. Congratulations. Good job here.Mike:
I'll let you in a little secret. And then I promise you, we're gonna get back on topic with a couple other points. I'll let you into a little secret, though. You're exactly right. People already have the answers. My job is not to give them the answers. My job is to help them sort out what those answers are and how they're going to implement them.Matt:
Well, you know what? That's extraordinarily valuable. So, good job. All right. All right, back on track.Mike:
So we'll do that some other time. So dollar cost averaging. So another question would be like, Alright, I have $10,000 I do like this idea of getting in a couple of chunks, because I want to feel good, you know, minimizing regret. And so I put in a little bit now and if it goes up, I feel good. I just made money. If it goes down, I feel good, because I've got some money sitting on the sidelines to get in. So either way, I'm feeling pretty good. How long should you know, what kind of timeframe should I do with these things? So typically, I started about a year depending on the size, I mean, if we're talking $10,000. And that's a very, you know, say that's a small percentage of your overall portfolio, I might say, you know, three chunks over three months, right. So, you know, we'll just kind of get in, you know, pretty quickly, right? But a lot of times people have built up, you know, $50,000, or even $100,000 of cash over one or two years. And it's a pretty big chunk, you know, is now a good time for getting into the markets. And so I might say, let's do that over 12 months, we'll do it in three, three chunks, over 12 months, we'll do a third now, a third in six months, and a third a year from now.Matt:
Do people come to you seeking that kind of people a little bit more skittish when we've gone through a period of high volatility and even bearish periods in the market? Like we saw in 2022?Mike:
Yeah, it's interesting, when things are volatile, people are skittish. Also, actually, when things are going really well, I mean, I've met uh, you know, a lot of clients coming in, you know, the end of last year, going into this year, and it's kind of like it should we get in the market now. They've been watching, it's been going up and up and up, you know, so there was a lot of that as well. So luckily, this year is a good year for getting in. I mean, anytime the markets down by 10% or 20%. You know, this is a time that you might want to lump sum a little bit more. Now we're up a little bit from that from the lows over the summer. You know, I have no idea as always, I have no idea where we're going from here. Right now I’m kind of 50/50 going up or down from here. So if you find yourself in a situation that you're putting some money to work, you could lump sum it now. I would have no problem with that. Of course we talked about but if you wanted to do it Do a pretty short term, I would do it over the next six months, you do want to either do one of two things, one, set yourself an exact timeframe like on the first of them, I'm gonna do over six months, six chunks on the first of the month. So just the first of the month, make sure you do it automated or set a calendar reminder always do it the same. Don't second guess you can't second guess and be like, ooh, and the market just went off for the last three days? I'll wait a few days. Right? No, do it on the first of the month. Or else you'll just be sitting on the sidelines forever. So definitely do that. Or sometimes I'm a little opportunistic the other way like, Oh, it's coming up the first of them, like if I'm watching the markets coming up the first of the month, but geez, we just terrible week, you know, it's gone down six or 8%. This week, I'm gonna go ahead and preload and do it accelerated. So in other words, that the market is going down, you could accelerate your investments, geez it's already gone down. I'm buying at a lower price. Now let me go ahead and get more of my money to work.Matt:
All of this is just reminding me of how much it's just ironic that I do this show with you because I hate watching the market. Because I know and we've talked about the fact that no good comes of it. Why is it valuable? Like you're not going to if you try to time things in any kind of a micro way, you're going to 80% of the time you're going to hurt yourself, right? You're going to cost yourself money by trying to outperform the market, and it only causes stress. And if it's gone up, then it's going to feel ephemeral. And you just said to your clients after a period when things have gone up. They're just as skittish as during a period of high volatility. Anyway, this is my PSA, once again, for the idea of just take a super long term view on that note, any other things we should cover about dollar cost averaging?Mike:
Yeah, just one other small point. This is if you have some money, you're trying to get to work. If this is money you already have invested you're rebalancing, especially if you’re in some high cost funds and you're trying to get some lower cost funds. Just do that all at once. You know, so if you're already invested in the market, and you're doing some tweaking or rebalancing, you don't need to average that just do that all at once. This is really, you know, if you're getting into the market with some money, this might be a strategy. That makes sense.Matt:
All right, I have to say, that was interesting. And I didn't think when like we started with the idea of well, we have the answer I thought we were in and that's the end of financial life planning with Mike Morton. Turns out there's a lot more to it, and I really see where we're coming from. All right. I think if we've learned nothing else in this episode, it's that this show is all a gigantic test for me, and apparently, I'm failing, I am not able to establish my humanity. Thanks for making me feel great about myself. Mike Morton of Morton financial advice and financial life planning thanks.Mike:
It's good to be here, Matt. Thanks. Thanks for joining us on financial planning for entrepreneurs. If you liked what you heard, please subscribe to and rate the podcast on Apple, iTunes, Google Play Spotify, or wherever you get your podcasts. You can connect with me at LinkedIn for Morton financial advice.com. I'd love to get your feedback. If you have a comment or question, please email me at financial planning . Until next time, thanks for tuning in. This recording is for informational purposes only and should not be considered for investment advice. Opinions expressed as our of the date of recording. Such opinions are subject to change. We do not guaranteed the accuracy or completeness of the data presented here.