Mutual Funds for the Utterly Confused

Not many of us like the term average. It implies that you could have done better while suggesting on the other hand that most have done worse. Average looks are not how any of us want to be described. Average income also comes with the stigma that someone is also doing much better. And if you have an average income, you probably got average grades in school, came from average parents in an average town. Mathematically, average is good.

For those wanting to know what is generally expected, average sets the baseline with some factors doing well and some doing worse. Both are called anomalies and are not treated the same way we would treat a below (or for that matter, an above) average cohort. One we disdain, the other we attempt to emulate.

And this is where the problem begins for most of us. Average just doesn’t seem to be good enough. But as it happens, when it comes to investing, this slow-as-a-turtle approach, the steady feeding of your accounts in a rhythmic, no thought way is proving to be the best way to keep invested in a downturn and not be over invested when the markets begin their run for the top.

First rule of investing is wrapping yourself around the notion that you cannot pick a bottom nor can you find the peak. Panic causes one while euphoria pushes the other. Both are emotions that suggest nothing average. Instead, they are firmly rooted in extremes. Yet we still run from one while rushing toward the other. We are genetically wired to do so. If our early ancestors heard the cry “stampede” the last thing they would want to do is run towards it. But if those same ancestoral leaders found something that would make your survival easier, you would not run away.

Mention dollar cost averaging to your friends and it will no doubt be met with disdain. Even if they had employed just such a strategy in their own 401(k) plans on the way up, many have stopped the practice on the way down. Defined contribution plans like 401(k) plans offer the employee the chance to contribute a measured amount of pretax income from every paycheck. This had the effect of giving the participant a good feeling when the markets where on the rise.

Some allowed for only the company match. Some were forward thinking (or at least they thought of themselves as such), going beyond the match and putting as much money as they could possibly afford into their plans. The markets rewarded those efforts by rising, almost steadily for years.

And then, the bottom dropped out - as we all know. Folks lost faith in Wall Street and rightly so. The narrative turned negative triggering those base emotions to run for the exits. When someone yells “fire”, few will attempt to find the source and make our own judgments. We are genetically conditioned to trust those who control the crowd.

But when it comes to the stock market, a place where risk is as important as the blood coursing through your veins, you would do well to look for the reasons why, reassess your positions and make determinations on your own. Dollar cost averaging does that for you.

If you have stayed put, not sold your positions or reworked them into other types of more conservative investments, you will come out the clear winner. When is harder to say. Dollar cost averaging ignores the news, disdains the panic and refuses to get caught up in the euphoria. All of these elements move the markets in one direction or another. DCA keeps your invested dollar right in the middle.

In times of lower prices, DCA allows your dollar to purchase more shares. in times of higher prices, DCA keeps you from chasing overpriced investments. It understands that average is much better for the long-range investor. It understands highs and lows and takes much of the wagering out of your investment decisions.

For those of you that have kept your investment allocation on a steady stream may have thought you were throwing good money after bad. Some of you have continued to do so even as your employer has cut or eliminated their matching contribution. Some of you have wondered whether what you did was the right thing to do.

In only a few instances will you be able to look back at what history has taught us - many of the charts and analysis from the past seem to no longer have relevance as we move forward - and seek comfort in our decision. Those who seek the average, tend to do better than those who do not. I could tell you that had you invested $100 each month for thirty years from 1929 to 1959, your $36,000 would be worth $411,000.

Would some investors have done better? Without a doubt. Would some have faired worse? I am sure of it. But average would have netted you something neither group had and that can be warm comfort when the markets turn chilly.

Some things to note about DCA. This method works best when you are buying mutual fund shares. Buying individual stocks is much more treacherous to try and do even if they are your own company’s shares. Mutual funds spread the risk again by allowing you to purchase a basket of securities rather than one or two. And spreading risk allows you to embrace it without hugging too tight.