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3 Reasons to Invest When the Economy Is Uncertain

By Catherine Brock - Jun 23, 2020 at 9:33AM

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Now might be just the right time to enter -- and stay in -- the market.

The economy hasn't recovered from the first wave of COVID-19 and the government is preparing for a second wave to hit this fall. Although unemployment has dipped slightly from 14.7% to 13.3%, it's still shockingly high relative to the historic low rate of 3.5% we saw in February. All that uncertainty is enough to keep an early investor out of the game for fear of another round of wealth-sapping market turbulence.

Even so, this is not the time to sit on the sidelines. As long as you are investing funds you don't need right away, now is the time to bolster your resilience as an investor. Continuing to invest through uncertain times can be the difference between building wealth and simply treading water. Here are three reasons why.

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Lower your cost basis with DCA

Dollar-cost averaging (DCA) is the practice of investing a set amount at regular intervals. The goal is to limit your exposure to price volatility. One month, the share price might be higher when you buy. The next month, it might be lower. Keep investing every month and these fluctuations average out over time, generally resulting in a lower overall cost basis.

A lower cost basis is advantageous because its relationship to the current share price defines your unrealized gain or loss. A lower cost basis means a bigger gain when the market is rising or a smaller loss when the market is falling.

The alternative to DCA would be to save a larger sum and invest it all at once. Follow that strategy and you risk making your purchase on the day the share price peaks before a crash. That scenario creates the largest possible unrealized loss, and it's also tough to deal with emotionally.

There's also a wishy-washy middle ground between these two options, which is where many investors get stuck. That's the place where you invest regularly when times are good, but stop when the market goes sideways. This pattern guarantees you'll pay higher prices than necessary for your shares because you're only buying when they're rising.

Maximize your recovery gains

Continuing to invest through all market cycles lowers your cost basis, but it also gives you a bigger share base to build on going forward. This story is best told with numbers. Take a look at the table below. It shows two scenarios: Investor A, who keeps investing no matter what, and Investor B, who pauses in April when things get dicey. Both are investing $200 at a time.

Month

Share Price

Investor A Shares Purchased

Investor B Shares Purchased

January

$50

4

4

February

$51

3.92

3.92

March

$52

3.85

3.85

April

$37

5.41

0

May

$43

4.65

0

June

$45

4.44

0

July

$48

4.17

4.17

       

Total Shares

 

30.44

15.94

Total Cost

 

$1,400

$800

Cost per Share

 

$45.99

$50.19

Source: Author calculations

Although the July share price is still down slightly from January, Investor A has an unrealized gain thanks to a lower average cost per share of $45.99. Investor A also has nearly twice as many shares as Investor B, which means more opportunity for future growth and bigger dividends.

Investor B invested $600 less than Investor A at the average cost per share of $50.19. That's higher than the July market price of $48, which translates to an unrealized loss of $2.19 per share -- or about $35 in total. At the July share price, Investor B has a portfolio worth $765.12; add in the $600 uninvested cash, and that equals total wealth of $1,365.12. Investor A has no extra cash, but a portfolio worth $1,461.12. As you can see, it doesn't pay to be conservative.

Build wealth consistently 

Christopher Davis, chairman and CEO of Davis Selected Advisors LP, once said this about consistency in investing: "Though tempting, trying to time the market is a loser's game. Ten thousand dollars continuously invested in the market over the past 20 years grew to more than $48,000. If you missed just the best 30 days, your investment was reduced to $9,900."

That's either a gain of $38,000 or a loss of $100. Let that sink in for a minute.

At the end of the day, the only way to guarantee you'll benefit from the best days in the stock market is to accept the worst days. Stay consistent, because that's how you'll win.

Ignore the uncertainty

It doesn't matter if the economy is good, bad, or uncertain. Keep investing. Set your budget and deploy those funds into quality positions each and every month. When the economy's bad, pad your positions and push your cost basis lower. And when the economy's good, you'll be rewarded for your resilience.

 

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