I believe in being disciplined and patient when it comes to investing. I don't know how many times these two characteristics have saved me from making bad investment decisions or acting on an impulse.
Let's say you recently got a financial windfall and now you are sitting on some cash that you would like to invest in a broader market using a low cost Index Fund. You can either go all-in and invest the entire sum of money in one big lump-sum, you can try to time the market, or take the dollar-cost-average approach.
The lump-sum approach works best when the investment horizon is very long (10+ years) as the time spent in the market and large initial amount helps your money grow faster given the compounding effects of the initial lump-sum amount, dividends earned, and long-term market growth. Therefore, in most cases, the lump-sum approach would give you better returns if your investment horizon is very long.
For short to medium term (3-5 years) investment horizon, dollar-cost-average with a bit of market timing may be the right approach. Dollar-cost-average approach forces you to invest in smaller chunks at regular intervals; thus preventing any big dips or spikes from having a single big impact to your investment.
The benefit of dollar-cost-average approach is that you don't have to worry about timing the market and over a period of time, your investment cost will average-out as you will be able to buy both at peaks and dips. Of course, one can always mix this strategy with a bit of market timing by increasing invested amount when market takes a dip or reducing the amount when market spikes or is overvalued.
Regardless of your investment style or strategy, you need discipline and patience to execute and stay the course. Most people lose money in stock market when they deviate from their set path or panic trade.
When I decided to be a serious investor and make investing my path to financial independence and early retirement, I knew I had to be extremely disciplined about it by making a business plan and setting rules and principles for my investing career. You can read about it here: My Investment Principles
The discipline forces me to follow my business plan of only investing in dividend paying high quality stocks that meet or exceed minimum requirements I have set for my portfolio. I do occasionally make adjustments to some of my rules depending on the market conditions and opportunities that may arise from time to time. However, core principles such as only investing for long-term or never buying a stock without doing proper analysis, never change.
Market can be tempting at times and if I don't have the discipline to follow my core principles, I could end up investing in companies that I don't understand or buy investments that are artificially inflated and could potentially cause me big losses down the road. The discipline also refrains me from following a herd mentality and instead helps me make my own investment decisions that are based on my core investing principles while still taking inputs from market and economic conditions.
In stock market, it pays to be patient. Like a fisherman who is waiting for the great catch of the day, you have to be patient enough to wait for the right opportunities and market conditions to come your way.
At times, it can be extremely difficult and frustrating when we expect market to go into correction but instead it continues to rise and we end up sitting on lot of idle cash that is doing nothing. I know the feeling as I have been there.
One way to get around the feeling of idle money is to ask yourself whether you would be okay in short-term if you invest in a lump-sum now and market crashes 10%, 15%, or even 20% in the coming weeks or months. Can you handle a big market correction that can reduce the value of your investment in half? Cash is the best investment you can have in uncertain times, so there is nothing to feel bad about patiently waiting on cash for the right investment environment or opportunity to come your way.
US stock market is at historic high levels and we are due a major correction; though nobody knows when that correction will come. Even though the US election is over, there is still a level of uncertainty on what the new president or government will do for the economy. Will the new policies help economy or hurt economic growth? At this point, nobody knows for sure as the politicians say lot of things to gain votes, but seldom deliver on all their promises.
We will have to be very patient and see what happens in the next year or two in terms of new policies and how market and economy reacts to those policies.
In the meantime, for any lump-sum broader market investments, I would only invest using dollar-cost-average technique unless my investment time horizon is at least 10 years. Dollar-Cost-Average will also help alleviate the feeling of money not doing anything while providing protection against large market swings.
Just because you have money sitting in a bank or investment account, doesn't mean you have to invest it all right now. There are and will always be better opportunities in the market as our world is constantly changing and market reacts to world events. So, don't overreact and put all your money on the first 5% market dip you see. Instead patiently try to dollar-cost-average through the ups and downs of the market and be disciplined about it.