Investing in a Down-Market Using Dollar-Cost Averaging

Investing in a down (or negative) market isn’t easy. In fact, it might be one of the hardest things to do. To borrow a sentiment from Warren Buffett: You have to be greedy when others are fearful. But when fear is everywhere, that’s far easier said than done.

Yes, the research shows that investing a lump sum all at once often delivers the best long-term results. However, what’s “optimal” on paper doesn’t always align with what’s realistic for you emotionally. If you know you’re likely to panic or pull your money out if the market drops further after you invest, then the best academic strategy isn’t the best strategy for you.

The key is to design your investment plan around staying invested for the long-term, not around chasing the perfect timing. That’s why, for many investors, easing into the market using a strategy like dollar-cost averaging (DCA) is a smart alternative.

What Is Dollar-Cost Averaging?

Dollar-cost averaging is a simple yet powerful way to take the emotion out of your investing decisions. Instead of trying to time the bottom of the market, dollar cost averaging spreads your investment out over a period of time, investing the same amount at regular intervals regardless of whether the market is up or down.

This approach helps shift the focus from short-term volatility and emotion to a long-term data-driven process. By committing to a plan like this, you’re less likely to make impulsive decisions during turbulent times and more likely to stay on track with your long-term goals.

How Do I Invest in a Down Market without Guessing the Bottom?

Let’s say you have a lump sum you’d like to invest, but the markets are volatile and you’re feeling cautious. Rather than putting it all in at once, you could divide that lump sum into three equal parts and invest one part each month for the next three months.

If the market moves even lower during that time, your later investment purchases will happen at lower prices. If the market rises, you will still benefit from getting some money invested during a pullback. Either way, you’re participating in the next market move and more importantly, you’re taking an approach that is aimed at keeping you invested for the long term.

How long should you stretch this process out? There’s no perfect answer, but we often suggest a period of 3 to 6 months. That range tends to be a “Goldilocks” zone in our opinion, not too fast or too slow for most people. If you’re extremely risk-averse, you might prefer the longer end of that range.

Have a Data-Driven Trigger to Go All In

One drawback of dollar cost averaging is the potential to miss out on quick market recoveries. That’s why it helps to pair your dollar-cost averaging with a data-driven trigger that can override and speed up the process. This trigger is something that signals when it may be time to accelerate your plan and invest the remaining cash sooner.

Monument Wealth Management monitors broad market momentum over short, intermediate and long-term timeframes closely. When the data suggests strong negative momentum, we often recommend dollar cost averaging (DCA) for clients who are nervous about investing all at once. But we also install a “go” signal, so if our data shows a shift toward positive momentum, even if things aren’t perfect, we have the flexibility to speed up the investment process.

Will this system perfectly time the bottom? No, that’s impossible. It’s also okay. Even when this condition is met, there’s a possibility the markets will move lower from that point. But the historical data tells us when the momentum shifts from negative to positive after significant declines, there’s a good probability of strong long-term returns.

In the end, it always comes down to the probabilities and not the possibilities. The goal isn’t perfection; it’s improving the odds.

The Bottom Line

Let’s face it: most people struggle to invest confidently during downturns. Even though many know that buying when prices are lower can lead to better long-term gains, actually pulling the trigger in a scary market environment is difficult.
That’s why it’s so important to have a plan. Dollar-cost averaging, especially paired with a system that adapts as the market trends change, can be a smart way to manage emotions, stay committed to the long-term, and help investors take advantage of market volatility.
Yes, the “optimal” strategy might be to invest everything right away. But what’s even more important is choosing a strategy you can stick with. Because when it comes to investing, the best plan is the one you can follow through ups, downs, and everything in between.