Episode #15 – Money Myth #3: You Shouldn’t Invest It All at Once

Welcome to the Millennial Money Moves Podcast. On this episode, Blake and I are diving into money myth number three, dollar cost averaging.
Dollar cost averaging is often seen as a safe, disciplined investment strategy, and in reality, it’s just a form of trying to time the stock market. And like most timing strategies, the odds of it working are not in your favor.
We hope you enjoy this one. This content is purely educational and does not intend to be financial advice or financial planning.
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If you would like to receive personal financial advice, please reach out to Babin Wealth Management directly at babinwealth.com. Let’s make moves.
Welcome back to the Millennial Money Moves podcast, the podcast where we’re breaking down the financial stuff that matters to your real life. Back at it, we went on kind of a little summer vacation there, Blake. I took two weeks off.
You took a week off. Tell us about yours. Where did you end up going?
Yeah, and I think our viewers can relate.
I mean, summer, especially in our industry, tends to simmer down, right? But as the viewers should know, we’re both in Arizona, but my roots are in Connecticut and family in Boston. So I did a little trip back to New England to enjoy the humidity.
So how about you, man? How was your two weeks?
Ours was good. So my fiance, Megan, she’s from Cincinnati, Ohio area. So we went back there for a few days to see her family.
And then we rented a car and drove from Cincinnati through Tennessee, North Carolina, South Carolina, and then made our way to Atlanta suburbs for our final stop. And yeah, man, got to experience some of that humidity too.
I feel like every time we try and escape Phoenix in the summer, the heat just follows us. Like everywhere we went, they were like, it’s way hotter than average.
He wave, he wave. We’re like, no.
What the hell, man? Like, can we get some relief, please?
I think there’s an episode to have, Sean, about debating between Arizona dry heat, or New England summer, East Coast summer with humidity at 95%.
So there is. And the only way to do that is like report live from each location and just be like, how are you feeling? How are you doing?
Hopefully, I don’t get New England because I’d be sweating on that live report.
So we’ll miss doing the podcast.
And yeah, man, good to see you.
Sorry to the listeners for not giving you a heads up.
We’d be taking a few weeks off there, but we’re back at it again. And yeah, I’m the host, Sean Babin. I forgot to say that at the jump.
And my co-host, Blake Van Danny, we are back in the driver’s seat for the Millennial Money Moves podcast. We are going to be breaking down Money Myth number three for our listeners. If you’re keeping track, we’re on Money Myth number three.
And this is going to be an episode about dollar cost averaging. So any listener is going, what the heck is that? Dollar cost averaging is the idea of spreading out an investment over time.
I use the example in my meetings that you make some money off selling your house. Let’s say it’s $100,000 that you’ve got left over from the sale. You’ve agreed with your financial advisor or your wife that you want to invest this money.
And so some advisors will sell you on this comfy cushy idea that, hey, instead of investing it all today to make you more comfortable, because the market can’t go up, but it also can’t go down, let’s spread this out.
Maybe we do $10,000 a month for the next 10 months and kind of ease into the market. And that sounds great. That sounds very like they gave you, the bad advisor gave you the hug.
They’re listening to you. Maybe you’re concerned about investing or nervous about where the market’s going. And you love that idea.
That sounds a great way to just put our toes in the water and kind of slowly invest this 100 grand that we feel fortunate to have. Well, if you’re looking at the data, which we’ll get into, dollar cost averaging is a huge swing and a miss.
It’s more of a market timing element than it is just actually investing. And what I mean by market timing is the only way that dollar cost averaging works out in your favor is if the market goes down. Think about it.
If you invest today, and a month from now, you’re going to invest that additional $10,000, and the market’s gone higher, well, you should have invested it last month.
And then if the market goes higher again, well, again, you should have invested at the beginning. So the only way that dollar cost averaging works in your benefit is if the market goes down, and no one invests for the market to go down.
We don’t invest to lose. There are periods inevitably where it does. And if you invest it all in January and then in June, you’re down 10%, you’re going to feel like an idiot.
But I’ll show you the rationale behind it with the data and why this doesn’t work out in your favor in the sense of the percentage of times that the market is positive is so much greater than 50-50. So you shouldn’t wait for tomorrow to invest.
You should invest today. Have you kind of heard this concept, Blake, or kind of come across it in any of your maybe investing decisions or conversations with advisors?
Absolutely. And I think just two points before you get into the numbers, from a 1K perspective, you kind of just follow those rules anyway because it’s a per-payroll deduction.
So you don’t really have the luxury of trying to upload or upfront purchases when you put your money into the 401K plan because it’s a per-payroll deduction, typically.
The second point I had for you, and hate to put you on the spot, but you know I love to, is there an advantage or like why most advisors tend to push towards this concept of dollar cost averaging? Or is it just is it more of just an easier concept?
Like, you know, why would an advisor tell you to do it that way versus putting all the 100,000 in your example right away? Like, is there any benefit to the advisor?
Or, you know, again, probably putting you on the spot there, but just curious from my my eyes.
No, really good question. Let me and I want to hit on the first one, too, that you started on with investing in your 401k per paycheck. That is the only form of dollar cost averaging that we endorse because it’s the only way that you can do it.
It’s it’s it’s from a cash flow standpoint, meaning I’m going to invest every time I get paid. It’s not from a market timing standpoint. What I’m saying, I think the market is going to go down.
So I’m only I’m going to wait till next week to invest. It’s just on repeat every two weeks. You’re investing, you’re investing, and that is a beautiful way to do it.
I think from an advisor’s perspective, if your client is hesitant to invest, this is like a way to make them more comfortable. It’s like I said, they might not know the data behind it either. It’s a client comes to you with 100 grand.
Let’s even call it a million bucks and they’re wishy washy or they’re not certain or they’re scared of the market or they have a story of their family losing money, trading stocks, whatever the case may be, it’s emotional to them.
Or the advisor will go, instead of losing this prospect, how about we do this? How about we just do 100 grand now, then we’ll do 200 grand in six months and then 300 grand in six months until that whole million is invested?
Because that’s a win for the advisor, meaning that client’s like, okay, I like that strategy, that sounds good. And now that’s a new client or prospect, whatever the case might be.
And now they’re working with them versus scaring them away and being like, no, I’m going to invest your million today. If you disagree with me, then go somewhere else, like kick rocks kind of thing.
And hearing you explain it, I guess from a consumer lens, they’re probably a little bit hesitant if it’s a newer relationship to just give an advisor a million. Hey, I’d rather give you 100,000, see how that does.
Not necessarily that ties the dollar cost averaging, but maybe there’s a little bit of a psyche concept to that point.
There definitely is like a testing element from prospects. And that’s super hard because that’s just all luck. Like let’s say you’ve got half a million with another advisor and it’s not really working out.
You’re interviewing somebody else and you come across me and you like me and you want to work with me and you say, well, Sean, let’s start with 100 and we’ll see how that does.
I have zero control over what the next six months bring and I have no idea or control over what your other advisor is invested in. So let’s say that you have all your money in one area of the market with your other advisor.
And I do this diversified portfolio that I believe in. And that area of the market that your advisor in, that your other advisor is in just is amazing over this next six months. And I do half of what that does in performance-wise.
That one does 20%. I do 10. You’re like, you’re an idiot, Sean.
I’m going to stick with my guy. He made me 20%. Okay, the next year, he’s down 30 and I’m down 10.
Who really wins?
What is the net?
It’s just guesswork. It’s all about like, that’s just purely testing the waters with no real, there’s nothing other than just a luck element to that whole thing. So that’s the same with dollar cost averaging.
It’s a pure luck element. If you slowly invest and the market goes down, and you get to buy more shares at lower prices, then that’s great. That was a guess that you made at that time, and it worked out in your favor.
Well said.
Just a little nugget on the 401k side. I have had clients where they’re like, well, I prefer to just put the limit of $23,500 in 2025 in their first couple of payrolls. And as long as your HR team and payroll can handle that, it’s absolutely enough.
And your income. But what the nugget is, is if your company is offering a match, sometimes they only match on a per payroll basis.
So if you front load that $23,500 in the first three months, you’ll get matched whatever the company offers on the payroll perspective. But what about the other nine months where you don’t get to deduct because you’ve hit the limits?
Well, now you’re missing on employer match as well. So that’s where it could ding you as well if you’re trying to front load the market and try to time the market, whereas you just put the full amount across the full year.
How do you know that your company does that or not? Because I’ve ran into that with clients. And it’s crappy because some companies do it, some companies don’t.
So it’s like it’s not over arching like this is the law. So how do you know?
Yeah, it’s honestly trial and error. Yeah, if you ever try to do it for one year and then you come back and say, well, my total match dollars was only 4% of those three paychecks, not my annual salary. Hey, sorry, we do a per payroll match.
Make sure you change it for the next year. There are notices that should go out. But a lot of times the notices don’t have to include if they’re doing a per payroll.
So it’s a tough one. I think it’s a rare case, but it’s trial and error.
So it’s not like, ask your HR person, or do you have to look in the plan documents?
Yeah, I would say if you’re entertaining the idea of, well, I still like this idea. Sean made a great point. Maybe I just put the $23,000 in early.
Just reach out to your HR team or your benefits team and say, hey, if I do this, am I going to miss out on any potential match? And they should answer.
I’ll have clients who will get aggressive, do like 15, 20 percent in the first six months and max it out. And then a couple of people, we’ve noticed that.
Before I even knew it was a thing and then you go, shoot, we need to smooth this out over the entire year versus getting all aggressive about it in the first six months.
And you could lose out. I mean, that’s not going to be insane amounts because it’s still usually typically a four to five percent match, but it’s still probably a couple thousand bucks if you’re in that high earning bracket.
So you got to be cautious of that.
Yeah. No, like you said, if you only got four percent on six months of salary versus 12 months of salary.
Bingo. Big difference.
And you’re making good money. Like that’s a huge difference.
You got it. But so show us the number, Sean. I’m curious to see that come to life here as far as putting in the 100,000 or putting in over 10 months.
Yeah, let’s bring this up.
All right. So the whole notion is like on a month to month, you know, week to week, year to year. What’s the batting average of the stock market?
Like what is it done? Like how is it? How much is it positive or negative?
And is it better to put my money in today or wait? And that’s really all the dollar cost averaging is. That’s what it boils down to.
Should I invest that 100,000 today that I made off the sale of my home or should we slowly dip this into the market?
So what I’ve pulled up for the listeners out there is a bar graph that shows the total percent positive returns for the S&P 500 going from 1928 to 2022.
And percent positive in, you know, every day, one day, every single day going back to 1928, how many times was it positive versus negative? And the percent positive is 53%.
And then you stretch that out from one day to 10 days to one year to five years to 10 years to 20 years. And what I love about this data set, Blake, which might be hard to wrap your head around, but it’s any one year period.
So what that means is it’s not just January 1st to December 31st of 1928. Well, it’s January 1st to December 31st, then it’s January 2nd to January 1st.
They spend the data at any one year increment of any day of any year, and that’s how you get these data sets.
So what it’s showing you, again, listeners out there who can’t see it, is just how robustly positive the S&P 500% positive is, starting from one day. So at any one day, the S&P 500 is positive 53% of the time. That makes sense to me.
It’s just a coin flip. Every morning you wake up, your account could be up or down. Those are your two options.
It’s just like playing roulette. You’re either black or red. What are we doing?
And no one would do this if that stayed consistent from one day to one year to five years to 20 years. If it was always a 50-50 chance, we would just be going to the casino, having the same kind of outcome.
But what you see starts happening, Blake, is look at the one day versus one year. We go from 53% positive in any given one day to 75% positive in any given one year.
So right there shows me that those odds that are in your favor is why would you invest any differently? Like the line that I use for people is the best day to invest was yesterday. Today is the second best day.
Love it.
And so going forward, we go from one year to five year.
Five years, the percent positive over any five year period from 1928 to 2022 is 89%. And then you get to 10 years, it’s 94%, 20 years, 100%, 30 years, 100%.
And this graph right here is exactly why I have a job and why I believe everyone should do this and invest your money. Let this compounding work for you because it’s not this big risk that I think a lot of people think it is.
If the, like I said, if these numbers were in the 50s and 60s from one day to 30 years, no one would do this. It would just be way too volatile. But when you see a literal 100% positive over any 20 year timeframe, that’s pretty incredible.
It is.
I guess what I think it would be an interesting concept is if we could do like a fake test, right? All right. This person put 100,000 in on July 23rd.
This other person put in 10,000, and then 10,000 every month after until they hit 100,000. Do you think the returns would vary?
Yeah, it’s all market timing at that point.
Exactly.
So let’s say someone invested 100 grand at the top in 07. And we get the great financial crisis. And someone only invested 10 grand, and then they got to slowly invest 10 grand as that market went down.
Well, they’d be a lot better off than the person who invested 100 grand.
Because it was dipping, right?
But then the inverse is, let’s say someone who got 100 grand at the beginning of 09, and they put it all in versus someone who spread that out over a 10 year or a one year period, a two year period. Well, their return would be less than the person.
So it’s all about sitting here today. We have no idea what the future brings with the stock market. There’s no way to know the future, but we can look at the past, and we can look at numbers like I’m showing you here.
And so that’s how I have to get comfortable showing my clients why we invest it all today, is because look at this money. You’ve told me you don’t need for the next five to 10 years. Well, 89% of the time and 94% of the time, that money makes money.
That’s why we’re going to put it all in today and just wash our hands and be done and let this thing start working with for you. If you’re telling me you need this money in a year, maybe we’re not investing it. Maybe we’re buying CDs or something.
That’s a little too risky, but that five to 10 year window, that’s why we put it all in today. And everyone gets hesitant about the current state of the economy. I don’t like Trump.
I like Trump. I don’t like Biden. Whatever.
It’s political. People get emotional and they always think they know what’s coming on the horizon. And they’ll come up with any excuse not to invest when literally the best time that was to invest was the prior day.
So that’s the mental and emotional battle that me as a financial advisor have to get you comfortable with. And I just love telling stories with data because it removes like what does Sean think, and it just purely shows black and white.
And here’s why we’re going to do what we’re going to do today. It’s because of this. And I hope I can get you comfortable with these numbers and understanding why we’re doing it now versus, oh, Mr.
and Mrs. Client. Yeah.
Yeah. Let’s do what you want to do. Let’s stretch it out.
Because honestly, it could work and it could not. And if they don’t listen to me and they do it their way and it works out, well, then I’m an idiot. And if it’s my way and it doesn’t work out, then again, I’m an idiot.
So that’s always going to happen. But you have to get them comfortable with understanding these numbers and why we do what we do in that sense.
Well said. And I think the image, hopefully, the viewers will go on to YouTube to look at it. But it speaks for itself, right?
What’s the old saying? Men lie, women lie, numbers don’t.
So I love that, man. So yeah, I think final arguments here is like, if you’re considering making a large investment, it’s definitely normal to kind of feel hesitant about that.
On our end, we really emphasize building that well-diversified portfolio that’s kind of aligned with what you’re trying to do with that money. Do you have a five-year time horizon or is it 20 years? And we’re going to invest that differently.
And that again goes into kind of your risk tolerance and what that money is trying to capture.
And so with kind of the right allocation in place, there really shouldn’t be any difference with investing it all today versus stretching it out through time.
But as you can see from the data, investing it in day one works out for you way more than it does kind of stretching that out over a course of six months, year, two years, however you define that.
Absolutely, and I think just going through this and talking it through with you, I think maybe there’s an aspect of dollar cost averaging, feeling a little bit more secure. But what’s secure? There’s nothing secure when you invest, right?
So is that why you’re going with the dollar cost averaging method?
Exactly, and that’s the myth of it. The myth makes you… Dollar cost averaging sounds like a smart investing decision.
Totally, that’s what I was trying to say.
In my opinion, a myth, because you pull out these numbers and you realize that slowly investing doesn’t work out for you long-term.
You should have invested it at that time. And so, that’s the myth of it is it seems smart, it seems like rational, like why would we jump into this head first, or let’s slowly dip our toes in, then goes knees, waist, shoulders, head.
And I think you rationalize it that way for yourself. But then when you look back, because it gets to showing you more times than not, you will look back and say, shoot, I wish I would have invested it all at day one versus doing this slowly.
But inevitably, there will always be times where you’re going to invest and then it’s going to go down and you’re going to feel stupid, but just give it some time.
It will come back up that, you know, when the tariff stuff was going on earlier this year, I was telling you guys about, you know, clients that came on board, you know, mid March, late March, early April, and they bring over their money and they’re
now my client. And then, boom, they’re down 18% the next week. That’s tough and that’s emotional. And they’re like, I don’t think they’re mad at me, but those are moments where they’re just like, damn it, like I should have waited a couple weeks.
But it’s all hindsight. You don’t get to know that’s coming. And then now look at, you know, we’re well past that.
Every stock market’s at all time highs. People’s accounts should be at their highest level that they’ve ever been. You should be tapping high water marks out there right now.
If you’re not, come talk to me, because that’s where the market’s at. But if you had made the mistake in that moment, which dollar cost averaging might have been, then you’ve left money on the table.
I just got to say, Sean, I mean, A, always appreciate the free game, and it’s awesome. But yeah, I think I might have to keep this line in the back of my head moving forward, is the best time to invest was yesterday. The second was today.
I think that was awesome.
Yeah, man, we’re glad you liked it. Good to see you again, man. Always.
More to come.
Back at it again next week.
We promise. Appreciate you guys.
Thanks. Have a good week.