In case you missed it, we launched a cryptocurrency index a few weeks ago. With great anticipation and excitement, my account was funded and traded on launch day. I waited until late in the afternoon for confirmation that the wire from my bank did in fact make it to my new crypto account and breathed a sigh of relief.* When Anna, RWM’s Chief of Staff, confirmed receipt of my wire, she informed me that my account would be traded around 7 pm that evening.
Trading at 7 pm on a Friday evening is a new experience for me. This was my first clue that crypto is a totally different world than traditional stocks and bonds.
I woke up Saturday morning to the news that Bitcoin had ‘crashed’ 20% overnight. Whomp! The reality that crypto is 4-5 times more volatile than the stock market literally slapped me in the face. Luckily my position size is appropriate, so I am not sweating it. I made the investment assuming that 50% price declines are the rule, not the exception.
The whole experience reminds me of an analogy I share with clients who are nervous about investing a large chunk of cash in the market. I say it’s always better to be ‘on the train’ than to be standing on the platform. We can make adjustments, such as rebalancing or tactical shifts, once the cash gets invested. We also know that 95% of the time, investing a lump sum outperforms dollar-cost averaging. My colleague Nick created a wonderful visual of this data.
I understand that investing a large chunk of cash near all-time market highs is anxiety-inducing. Over the past 22 years, investors have experienced the bursting of the Dot.com bubble, the Great Financial Crisis, and the COVID crash. We understandably get nervous when the market makes new highs. Our brains are anchored on the repeat experiences of market highs, followed by market crashes. But those past experiences do not help us predict the future (spoiler: no one can!), and we must train our brains to focus on the long-term.
First, let me define a large chunk of cash and the type of investor making this decision. For the regular saver who invests a portion of her salary each month in a retirement plan, dollar-cost averaging is a great option. Large chunks of cash come to investors in a variety of ways; one-time bonuses or incentive compensation, disposition of stock awards or options, the sale of a privately-held business, a life insurance death benefit, or the sale of real estate. At these pivot points, the investor is making a large shift, with a large portion, of their allocated capital.
Compare investing a large chunk of cash to getting in a cold swimming pool. It’s much easier to jump from the side than to wade in from the stairs. Rather than spend minutes torturing yourself with slowly rising cold water, you might as well take the initial shock of the jump, and enjoy your swim. There are steps you can take to minimize regret or avoid jumping in on an unusually, unlucky day.
Nick’s chart above illustrates the difference between investing in a 60/40 (stock-to-bond ratio) portfolio all at once, versus a methodical dollar-cost averaging strategy over 60 months. All things being equal, we know it’s better to be invested soon, as opposed to waiting. But that doesn’t mean you have to pick one single day to invest a large sum. Now that trading commissions are a relic of the past, there is essentially no cost to splitting that large chuck into thirds or fourths and investing each slice over a few weeks or months.
I generally recommend investing the various tranches (my word for the slices of the cash pile) every 2-4 weeks. This calendar method helps avoid the trap of guessing what might happen in the market if the Federal Reserve has a meeting, or the inflation report or jobs report comes out. If the market sells off fast, investors have the option of speeding up the timing of investing the tranches. I call this situation a bird in the hand.
What I am describing is the art of investing, rather than the science. I have no doubt there are other methods that achieve the same results through different tactics. One of my favorite things about investing is that there isn’t just one right way to invest. The goal here is to trick the brain into thinking long-term when all we want to do is obsess over the day-to-day. Regret minimization is massively important, and the calendar-based approach gives the investor a relief valve if the market selloff immediately after the first tranche is invested.
Bringing this conversation back to where it started, my crypto index is down about 12%. I purposely held back half of my planned allocation to crypto and will invest more in one of two situations. First, if my account is down 50% from inception, I’ll buy more. If that doesn’t happen, I’ll add the second half of my investment around this time next year. It may not be the perfect solution, but there are no perfect answers when it comes to markets. Markets are still human, after all.
*I always feel nervous about wire transfers.