Investing in Uncertain Times

Was it a good time to invest in 1929?

If you would have invested $1,000 in US stocks each year from the start of the Great Depression in 1929 to 1938, you would have ended 1938 with $12,981, despite only investing $10,000.¹

How could that be?

This example shows an investing technique called dollar-cost averaging and how it can naturally help long-term investors invest more when the market is cheap and invest less when it’s expensive.

Here’s a simpler example to see how it works:

One week you pull up to the gas station to buy $20 worth of gas when it’s priced at $1/gallon. The next week you pull up and buy $20 worth of gas when it’s priced at $2/gallon.

What’s the average price per gallon you paid?

The immediate answer most people have is $1.50, but that’s not correct. The average price per gallon you paid was $1.33/gallon because you bought more when gas was cheap and less when it was more expensive.

That’s the potential of dollar-cost averaging. Investing a flat amount periodically over time and you’ll automatically buy more shares when prices are lower and less when prices are higher. Over the course of the year, you may have a lower average purchasing price than you would have if you put all your money in at once.

It’s worth noting that dollar-cost averaging only provides potential benefits in volatile or down markets, compared with buying and holding. When the market is increasing, investors would be better off putting money in as early as possible.