Editorial Team

Editorial Team

Market Timing vs Dollar-Cost Averaging: What's the Best Strategy for Investing?

If there is one thing the recent frenzy around GameStop, AMC, Bitcoin and Silver has taught us, it’s that timing the market is hard and potentially dangerous.

What started as a bizarre and sometimes fun ride has rapidly morphed, leaving a fair share of tragedy in its wake.

Source: Reddit

Source: The Washington Post

Dollar-Cost Averaging is the regular and frequent investment of generally smaller individual contributions of funds, while Market Timing refers to investment decisions based on market conditions, company news and data, and the interpretation of these by individuals paid to predict the future (or for free as on Reddit).

Timing the market is very hard, but it remains a core part of the investment industry. It's why investment analysts are paid high salaries to understand markets and companies in great detail and without apparent bias. It accounts for the bulk of investment content in the media and it pays the salaries of an army of advisors to help people forecast and predict the future. But does it work?

Dollar-Cost Averaging and Passive Investing — What They Are and How They Work

Dollar-cost averaging assumes the market timing does not work, but trusts that markets will continue to grow over time. For the century, they’ve increased on average by 10% per year. 

Dow Jones - DJIA - 100 Year Historical Chart

Source: Macrotrends

Dollar-cost averaging involves investing the same amount of money at regular intervals, usually monthly and irrespective of market conditions. This means that while investors may miss the opportunity to invest when the market is low, they will also miss the risk of investing all in one go when the market is high.

Dollar-cost averaging is typically made as a regular monthly contribution into an individual stock or a fund, which further reduces the risk of individual stock picks or an otherwise less diversified approach.  

The strategy works best over a long period of time — the longer the better so that you get the benefit of both averaged returns and compound growth. The problem is that this can be a lot of work; the manual labor of making consistently timed investments often puts an unrealistic burden on individual investors.

Auto Investing is the technical solution to this problem — by setting up an automatic contribution each month into your investment fund, the manual labor of maximizing returns is eliminated. Dollar-cost averaging is the close relative of and complimentary to passive investing.

Market Timing and Active Investing — What They Are and How They Work

Market timing involves entering and exiting investment positions based on human and increasingly technical, especially artificial intelligence (AI), analysis of the market. The great benefit of this approach is that if you’re correct, you can make above average returns. Of course, the opposite is also true. On top of the increased risk, this strategy comes at a price — in transaction fees, data fees, advisory fees and more. And while performance is not guaranteed, the fees are; you pay them irrespective of the performance delivered.  

Which works best?

You might expect a data-rich market like financial services would be an easy one to solve with some simple math. The problem is that billions of dollars of fees are at stake, so there is a strong economic incentive for both sides to crunch the numbers in a way that suits them. Looking at specific time blocks and certain investment funds or categories and using different underlying assumptions and rules can deliver whatever outcome you desire. You can wear yourself out researching, but ultimately, the investment decisions will be inherently subjective.

Can you do both?

Yes. Yes, you can. 

Almost everyone supports diversification as a way to mitigate risk in investing. No financial advisor of any kind would advise putting your life savings on Red at the roulette table. But it’s up to you to decide how diversified your portfolio should be.  

At Unifimoney, we believe that managing your wealth should be automatic and effortless. We created a single platform that automatically and by default helps you dollar-cost average into a low-cost diversified portfolio based on your risk profile. Customers can put in as much as they want each month on top of the minimum contribution of $25 per month. We embrace the Get Rich Slow philosophy.

For those who want to actively invest, they can do that as well — all within the same app. We have also enabled diversification through trading in alternative assets like cryptocurrencies and precious metals.  

We recognize and celebrate the fact that many people want direct control of their finances, which is why we’ve made a point to support both active and passive investing. Investing can be fun and an expression of your own personal beliefs and opinions — the key is to always be responsible and use a tool like Unifimoney which can help actively and passively build your wealth. 

*Important information and disclaimers

The above does NOT constitute an offer, solicitation of an offer, nor advice to buy or sell specific securities. The opinions listed above are not the opinions of Unifimoney Inc. or Unifimoney RIA, Inc. but represent the opinions of independent contributors. These contributors may or may not hold positions in the stocks discussed. Investors should always independently research any stocks listed and form their own opinions, while recognizing that any investments made may lose value, are not bank guaranteed and are not FDIC insured.