Personal Finance for Professionals Part II – Investing in Stocks & Bonds
Welcome back to Personal Finance for Professionals Part II, our multi-lesson series teaching you everything you ever wanted to know about investing in stocks and bonds. We’ve had a bit of a break since Lesson Six, where we discussed financial advisors. Before we move on to our discussion of bonds, we must cover a few more topics, including dollar-cost averaging. If you want to start at the beginning of this series, go to Lesson One.
Understanding Stocks
Timing the Market vs Dollar-Cost Averaging
In Lesson Five of this series, we learned why the US stock market “always” goes up. Historically, this has been true. A look at the S&P 500 over the past 98 years (1928 – 2026) shows a graph rising relentlessly, up and to the right.
But when you zoom in, you find that the ride up is a bumpy one. Think of the stock market as a reverse roller coaster. With a roller coaster, you start at the top and always end up at the bottom, but along the way there are ups, downs, sideways, and maybe even a loop-the-loop.
With the US Market, the value has historically risen over the long term, and I believe that this trend will continue. I am literally willing to bet my money that 30 years from now, the stock market will be higher than it is now. But over the short term, say the next five years, who knows? It may be a roller coaster ride up, down, or sideways! Consider the same graph of the S&P 500 as shown above, this time zoomed in to show only the years 1928 – 1954.
This section of the graph looks very different, doesn’t it? After its peak in 1929, the US stock market took 25 years to return to the same level. So, the stock market “always” goes up in the same way a roller coaster inexorably goes down. But the bumpy, twisty ride along the way might just make you sick. The period between the Great Depression and the end of WW2 isn’t the only one where stocks stagnated or dropped. There have been several more over the years, and there will be more to come. But, historically, the market has always recovered and gone on to new heights.
Two things can be true at the same time: the US stock market “always” goes up, and yet there are long time periods when it doesn’t. The question is, can you stay invested long enough to ride out these long downturns?
You may look at the above graph and get a brilliant idea. If you had just sold all your stocks in 1929 before the market crashed, bought them back in 1932, sold them in 1937, and bought them again in 1942, you would be rich! Buy low and sell high, right? Well, congratulations, you have just had the same brilliant idea as every other investor since the beginning of time. Unfortunately, market timing is a Siren, seductively drawing you near with its simple allure, but leading you toward the rocks of financial destruction.
The Efficient Market Hypothesis
The efficient market hypothesis is an economic theory that suggests financial markets efficiently gather and analyze all available information, so the current price of the overall stock market reflects its true value at that moment. There are several forms of this theory, but the strong form holds that everything known or knowable about stock market movements is already baked into the current price.
If anyone knew for certain what the stock price would be tomorrow, they would have already wagered enough money to raise the price today. Thus, the market only moves on surprise events – earthquakes, wars, new product developments, etc. The efficient market hypothesis implies that no one knows what stock prices will be tomorrow. Not you, not me, not your financial advisor, not Warren Buffett, or Jimmy Buffett. No one.
Market Timing – You Can’t Do It
The efficient market hypothesis is just a theory, so it could be wrong. Right? In theory. But aren’t there times when you know the market is going to crash? Didn’t everyone know that the market would go down during the COVID-19 pandemic? Doesn’t everyone believe the market is due for a correction, with the stock market at an all-time high?
For market timing to work, you must (1) make the right call, (2) at exactly the right time, (3) be right twice in a row, and (4) be able to do all this repeatedly without making a mistake.
- You must make the right call. Is the market going up or down? No one knows, and it’s hard to guess. I love the BiggerPockets Money Podcast and think that the host, Scott Trench, is as well-versed in personal finance as anyone. Yet in Episode 599 he revealed that he would sell $1M of his stock portfolio to buy real estate. Why? Because he believed the stock market was significantly overvalued due to its all-time-high cyclical P/E ratios, among other macroeconomic factors. As I listened to the episode, I agreed with all his reasoning. It made sense.
Yet, this episode was released in January 2025. Since then, the S&P 500 had a total return of 17.9% last year and has returned 13% YTD in 2026. If Scott had kept his $1M invested in the market, he would have $1,332,270 today.
What about the contention that since the market is at or near a record high, it means a crash is inevitable? If the stock market “always” goes up, then it must regularly push new valuation boundaries. In fact, the S&P 500 has hit a record high on nearly 7% of all days since 1950! 12% of the time, the market was within 1% of an all-time high, and 44% of the time it was within 5%. Just because the market is high doesn’t mean it’s going to crash.
- You must be right twice. To time the market, it isn’t enough to know when to sell before a downturn. To make a profit, you also have to know when to buy back in. You must be right twice. Sell high and buy low, remember? Below is a chart of the S&P 500 stock price during the Great Financial Crisis.
Even if you could predict that a crash was coming and sold at the top, how would you know when to buy back in? There was a drop in early 2007, another toward the middle of the year, a crash toward the end of the year, and we didn’t reach the bottom until 2008. If you bought back in too early, you missed out on most of the gains. If you wait too long, the market has already recovered.
It’s also psychologically difficult to buy when the market is crashing. Unless you’ve lived through a severe market crash, it’s hard to know how you will feel and what you will do. The market has fallen so far for a reason: a lot of very smart people are looking at the world and deciding to sell stocks all at once. People are panicking. They call investing into a downturn “catching a falling knife,” because you can get cut badly if you don’t do it right.
I was investing during the GFC, and I assure you that people weren’t calling the bottom in early 2008. In fact, most pundits were loudly and repeatedly predicting the market would go lower. People were scared that our entire financial system was collapsing. We’re talking, the sky is falling, Chicken Little-type panic. And this is when you need to calmly and rationally decide to buy back in.
- You must act at exactly the right time. The market can move fast. It seemed logical to assume that the market would fall during the COVID-19 pandemic, and it did. While I didn’t do the sell-high part (I’m too smart to try and time the market after all), I did want to buy low. I lived through the GFC and “knew” the market would eventually recover. I had a small amount of cash in my E-Trade account, so I used it to buy stocks near the bottom in March 2020. Here are a couple of examples.
Like a true financial nerd, I was excited by the stock market decline and wanted to buy more stocks on sale. Since I was now fully invested in my E-Trade account, I had to transfer money from my savings account to continue buying. Unfortunately, I sent a check, not worrying about how long it would take since I was sure the market would be down for a long time. After all, it took years for the market to recover during the GFC. Here is a chart of the S&P 500 during four months in early 2000.
This is what is called a V-shaped recovery, where the market rebounds quickly and unexpectedly. During this time, everyone was predicting an extended market downturn, yet if you wanted to buy at the bottom, you had about two weeks (March 16th – March 30th).
In this case, I had the right idea, but my timing was off. By the time my check arrived and cleared, the market was already climbing. And guess what? I waited to see if it would go back down, which it didn’t. I did buy eventually buy more stocks, but only after they had regained most of their losses.
Going back to Scott Trench, he may ultimately be proven right. But when? The market could crash later this year, or we could just as easily have another 5-year bull run before his predictions come true. As the saying goes, “being too early is the same as being wrong.
- You must be able to do this repeatedly. Your investment life is going to be 30–40 years. Unless you are already sitting on a large, invested net worth, one right call isn’t enough. If you got the dot-com bubble right in the early 2000s but mistimed the GFC in 2007-2008, you would have been right back where you started. There are always ups and downs in the market. Even if you get lucky once, you can’t time them all.
Time In the Market Beats Timing the Market
It is not possible to correctly and repeatedly time the market. It is easier and more profitable to simply keep your money invested over the long term. There isn’t always a dot-com bubble, a great financial crisis, or a worldwide pandemic that captures everyone’s attention. Most of the time, we’re all just living our lives, not thinking about our investment accounts.
The market “always” goes up. The S&P 500 has had positive returns in 73% of years since 1928. However, most of these positive returns occur on just a few days per year. Historical studies have shown that if you miss the 10 best trading days each year (the days the market climbs the most), your overall returns would be cut in half. It is better to be invested at all times, since you don’t know when these amazing days will happen.
Finally, market timing comes with tax considerations. Even if you manage to sell high and buy back in lower, if you are selling from a brokerage account, you will have to pay capital gains taxes, wiping out some of that gain.
There are many reasons why market timing doesn’t work, and why time in the market is better. The longer you have money invested, the more time it has to compound. It is tempting to want to miss the crash. However, consider this. Even if you had the worst market timing possible, investing all your money the day before the 2008 stock market crash, it would have taken you less than 10 years to double your original investment, but only if you had left it in the market.
Dollar Cost Averaging (DCA)
Dollar Cost Averaging (DCA) is the process of automatically investing a fixed amount of money each period on a regularly recurring basis. Since you invest every period, whether the market is up or down, DCA is the antithesis of market timing.
If this sounds familiar, it’s the prototypical way we invest in retirement accounts through our employer, with the rhythm corresponding to our paychecks. For example, if you get paid bi-weekly, invest bi-weekly. If you are an independent contractor like me, or if you will invest more than your retirement contribution limits, you will have to set this up on your own.
Since your contribution is fixed, the number of shares you purchase each period will fluctuate based on the market price. This is where DCA works in your favor. When the market is up, you buy fewer shares because the price is higher. When the market is down, you buy more because stocks are “on sale.” This is not market timing, but it lets you “buy low” more and “buy high” less.
Does DCA Work?
Let’s re-examine the S&P 500 chart during COVID.
If you were dollar-cost averaging $2,500 every two weeks into the S&P 500 during this time, this is what your account would look like.
Over this roughly 18-week investment period, the S&P 500 fell 31.1% to its nadir but rebounded to end with a 7.9% loss. However, with dollar-cost averaging, you purchased stock at varying prices, from a high of $3,370 to a low of $2,386. When the price was high, your $2,500 bought only 0.74 shares, but when the price was low, that same investment bought 1.05 shares.
At the end of the period, you owned 7.77 shares of the S&P, with an average purchase price of $2,888 per share. While you invested $22,500 during the period, on May 26th your investment would have been worth $23,248. You would have made 3.3% while the market was down 7.9%! No market timing. No having to be right (twice). Just steady buying regardless of what is happening. And if all this activity were automated, as it should be, it would have occurred without you even being aware. This is the power of DCA.
What about the Great Depression?
Remember this chart? The S&P 500 peaked in September 1929, then lost 89%. It took over 25 years, until November 1954, for the index to regain that same value. But if an investor began contributions on January 1st, 1929, and continued yearly until 1954, the total compounded nominal returns, including dividends, were 12.1% annualized. Dividends, higher in this era, significantly boosted these returns, yet capital appreciation still stood at a healthy 7.2% annualized even without dividends, thanks to DCA.
You may have heard that a market downturn early in an investor’s career would be the best thing that could happen. This is true if you use dollar-cost averaging.
How to DCA
You should follow the Financial Vitals Checklist to know where to put the money you will save/invest. The money that goes into your employer’s 401-K, including the match, should be automatically invested into the low-fee, broad-based index funds of your choice. If you must invest the money yourself, either in a Roth IRA, SEP 401(K), SIMPLE IRA, or a brokerage account, you will have to set up this process manually.
If you make a steady paycheck, this process is simple. Have your paycheck direct deposited into your savings account, then automatically transfer the percentage you want to invest into the appropriate investment account. You can also automate what investments you buy within that account.
For example, even though I only get paid once per month, I invest in my brokerage account every week. I have money transferred from my savings account into the brokerage. Each Tuesday, E*TRADE automatically buys a set amount of my investments of choice, currently VTI, VTIAX, and RSP. All I have to do is make sure the monthly paychecks keep rolling in.
How to Invest a Windfall
Dollar-cost averaging is great, but it assumes you are earning money on an ongoing basis so you can invest regularly. What should you do with a large amount of money that you receive all at once? It might be a gift, bonus, inheritance, or the proceeds from selling a business. Regardless of its origin, should you invest it all at once (as a lump sum), or spread it out over time (dollar-cost averaging)?
The mathematically correct answer is to invest in a lump sum. This may surprise you given how much we just pumped up DCA, and yes, if you happened to receive your windfall in August of 1929, you’re going to get screwed by investing as a lump sum. But remember two things I said earlier. (1) The market is up in 73% of all years, and (2) major market crashes like the Great Depression and the GFC are few and far between. This leaves a lump sum as the winner most of the time.
Investing as a lump sum also has an additional benefit. You actually invest the money. Many people can’t handle having a large amount of cash in their account. The money earmarked for DCA ends up going towards home repairs, minor emergencies, vacations, and luxury items instead of into the stock market. The road to hell is paved with good intentions, as my mother used to say. Better to just invest it all at once.
However, we are not little math robots. We have emotions. Messy emotions. Imagine your parents worked their whole lives to leave you a $1M inheritance that you received in June 2007. You invested it all at once, because that is the mathematically correct thing to do. And boom, the S&P dropped 57% over the next year. Ouch. Yes, if you held on to that investment, you would have been made whole within about 5.5 years (March 2013), but that would have been a painful and emotional ride. And if it were August 1929, it would have been a 25-year-long ride.
So, what do you do? A good rule of thumb is to invest any windfall that is not material to your net worth as a lump sum. Time in the market is better than timing the market, as we have established. Every now and again you might lose big, but most of the time you’ll come out ahead, and since the investment isn’t material, it won’t be devastating if the worst happens. If the amount of your windfall is material to your net worth, automatically DCA the amount over the next 12 months. This will help you avoid any emotionally significant losses if the market suddenly crashes, while not keeping the money on the sidelines too long. Or spending it on a boat.
What does “material to your net worth” mean? Well, that may be different for everyone, but I say more than 20% of your net worth. If you have a net worth of $500,000 and you receive a $200,000 payout (40%), I’d call that material; if it’s 50k (10%), not so much.
What Do I Do?
I am an independent contractor who gets paid monthly for working ER shifts, but I also receive large, unpredictable boluses of money as distributions from several businesses and partnerships. I’ve also received windfalls when I’ve sold a business and when I’ve sold rental real estate. What do I do?
As mentioned above, I DCA into my brokerage account weekly. This keeps me investing regularly and from trying to time the market. But I max out my SEP IRA in a lump sum. My SEP is with Vanguard, and I find transferring money to that account mechanically difficult, as (a) Vanguard’s website is notoriously not user-friendly, and (b) I’m terrible with computers/electronics/technology. The amount isn’t material to my net worth, so I find it easier just to send a lump sum every January and invest it all at once.
When I receive a large distribution or have a one-off event, like selling a business or a rental property, I play it by ear. This happens a few times a year, so I decide where I want that money to go based on my total asset allocation. If I want it to go to stocks, I usually invest as a lump sum.
Conclusion
You cannot time the market. Neither can I. More importantly, no one else can do it either, regardless of what your financial advisor, or the cardiologist in the doctor’s lounge, says. The best thing you can do is not to try. While you are working, invest through dollar-cost averaging. Make your investments automatic to take inertia and your emotions off the table. If the market is down and you want to invest more, I’m all for buying stocks on sale, as long as you are using additional money. Don’t change your automatic investing because you don’t know what the market will do next.
If you receive a monetary windfall, assess your overall financial situation, and follow the guidelines for any amount you wish to invest in the stock market: lump sum if it’s not material, DCA over a year if it is.
This concludes the stocks portion of Invest in Stock & Bonds, so in the next installment we’ll move on to bonds, an unsexy but important part of a balanced portfolio. See you then.
Thanks for reading. Have you been able to successfully time the market? Do you have any questions about investing in the stock market? Subscribe to the blog and leave any comments or questions below.
