By: Paul A. Werlin, President, Human Capital Resources, Inc.
It isn’t often that there is new information in the financial world that can actually help you make smarter investment decisions. Economists will always argue about recoveries or recessions, while so called pundits will try to glean insights into the Federal Reserve to make interest rate predictions. But these are just opinions and guesses, not facts. Nobody can accurately predict the direction of the markets or interest rates. That’s why new research from Northwestern Mutual Life Insurance Company is so interesting and useful — their just released research provides facts that can help every investor make better decisions about investing and investments. In addition, research from the highly respected Vanguard Group (the mutual fund and investment management company) back in 2019 is getting new attention given the heightened interest in the markets from new and younger investors.
The Northwestern Mutual study looked at one of the most widely used investment strategies: dollar cost averaging (DCA). With DCA, investors buy a fixed dollar amount of a stock, mutual fund or Exchange Traded Fund. For example, let’s say someone buys $100 worth of XYZ every month. In month 1, the price is $10, so they buy 10 shares. In month 2, the price is $20 so they only buy 5 shares, and so on. Using this method, the investor buys more shares when the price is lower, and fewer when it’s more expensive, and so gets a “good” average price. Or so it was thought until the NM research. Their research showed that from a purely return standpoint, investing a lump sum all at once outperformed dollar-cost averaging, by far.
NM’s research team analyzed rolling, 10-year returns of $1 million invested immediately in the U.S. markets, versus dollar-cost averaging. In the dollar-cost averaging scenario, the money is invested evenly over 12 months and then held for the remaining 9 years. The data show that investing a $1 million windfall all at once generated better cumulative total returns at the end of 10 years than dollar-cost averaging almost 75 percent of the time, regardless of asset allocation (a 100 percent fixed income portfolio outperformed dollar-cost averaging 90 percent of the time with a 60/40 at 80 percent, all equity at 75 percent). This difference in performance was there whether a portfolio was invested in all stocks or all bonds, and everything in between.
Now, there are still good reasons to dollar cost average — peace of mind, and if you only have small amounts of money to invest, it’s better to invest right away, and not wait to accumulate bigger sums. But the long-held belief that DCA was always the best strategy has been pretty much blown out of the water by this research.
In a 2019 whitepaper, Vanguard researched “Advisor’s Alpha,” or the value that a financial advisor adds to a client’s portfolio. Their study found that investors who used a professional Advisor realized a 3% higher net return per year, depending on a client’s circumstances and investments. Supporting these findings, a Morningstar (the mutual fund research company) study found a 1.82% annual net difference between a typical baseline investment portfolio and an advisor-assisted portfolio.
So, if you thought that advisors are only looking to “sell you things,” think again. I’ve posted articles in the past about finding the right financial advisor for you so I won’t go into details again. But there are several great ways to find help from referrals from friends and family to resources on the internet. The point is, that if you don’t have the knowledge or the time to devote, get help. Professional help really does make a difference!