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The tortoise or the hare?

The tortoise or the hare?

| February 01, 2023

Who wins the race?  The tortoise or the hare?  We all know this fable and the message is slow and steady wins the race, right?  Does slow and steady always win the race?  One of the things I love about financial advising is the answer to most every question is “It depends.”  This job is like working a living puzzle.  Every question needs to be evaluated on the unique factors surrounding the question.  When a client asks, “What is the best investment option for me?”  The answer is, “It depends.” 

The answer to the same question two or three years ago is likely to be different now.  As you can imagine, with all the factors that can affect a financial decision, like interest rates, the condition of the economy (inflation, recession, stagflation, growth), your risk tolerance, your time horizon, your needs, your goals.  I could go on and on.  All these factors need to be taken into consideration for financial decisions.

During a recent client review, I was asked about the pros and cons of making a one-time investment vs. making recurring investments.  And the answer is… It depends.  The method of investing the same amount on a periodic basis is often referred to as Dollar-Cost-Averaging.  The notion behind DCA is that you take out the challenge of timing the market as to when is the best time to buy.  Buying during the ups and downs tends to yield good results.  DCA and Market Timing are just two approaches to investing and there are many.  And, like I said, when to use one vs. the other depends on the factors listed above.

To answer the question, I analyzed the data for SPY in 2022. 

The SPDR S&P 500 ETF trust is an exchange-traded fund which trades on the NYSE Arca under the symbol SPY (NYSE ArcaSPY). SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index. This fund is the largest and oldest ETF in the world.  SPY was selected as a proxy of the S&P500 index.  This is not an endorsement to invest in SPY and no other indexes were used for comparison.  The purpose of this illustration is solely to demonstrate how Dollar Cost Averaging works. 

I compared a one-time $12,000 investment made January 1st 2022 vs. investing $1,000 a month from January 1st to December 1st 2022.  Take a look at the chart below.  You will see that SPY, ended the year down 14% for the year; from the beginning share price of $442.73 to the end share price of $380.68.

You might be surprised to see that the DCA approach yielded better results.  Your investment would have ended the year down by 5% which is better than 14% and you own almost 3 more shares.  History tells us that SPY will likely grow over time and you should recover the 14% loss. Your Dollar-Cost-Average investment will recover the 5% loss quicker, especially with those additional shares.



Now, does this always work?  No.  In a rising or bullish market it is likely that the initial one-time investment would perform better.  Dollar Cost Averaging seems to work better during volatile and somewhat bearish markets. Another factor is whether or not you have the cash on hand for a one-time investment or if you can carve out money from your budget each month for savings/investing. 

Here at Cardinal Investment Group, we work with each client “where you are.”  Meaning we will take in all the considerations listed above and help you make the best financial decisions.  We also employ an “active portfolio management” practice where we make adjustments in accordance with changing market conditions. 

I challenge you to get started with Cardinal Investment Group:

  1. REQUEST A FREE CONSULTATION. Get matched with a personal financial advisor.
  2. GET A FINANCIAL STRATEGY. Your personal advisor will work with you to develop a strategy that will fit your needs not theirs.
  3. EMPOWER YOUR MONEY. Sleep well at night knowing that your strategy will get your money working for you, not against you.

So, in this case… slow and steady does win the race.