Labor Day is one of those occasions when retailers can’t seem to fire off enough coupons or announce enough sales.
This time of year can be a great time to shop for end-of-summer bargains and back to school/work discounts. So perhaps its also a perfect time for stocks to be find their way into the clearance rack: All stocks 20% off!
Stocks aren’t hugely discounted, but they are selling at less than the average price-to-earnings ratio. And that bargain hunting is at the heart of dollar-cost averaging.
We all know that the best time to sell is when everyone else is buying because you’ll command the highest prices — and to buy when everyone else is selling, or in the case of today’s market, afraid to buy because you’ll get the best deals.
We are social creatures however. We love to travel in packs. We feel more secure buying stocks when everyone else is. It’s lonely to step out into today’s market and, with a very slowly recovering market, it can be scary.
But this is emotional, rather than rational, investing. It’s what makes your clients run from bargains in the stock market when they should be shopping.
Of course, investors are terrified. They’ve been through hell and they don’t want to go back there. But that is exactly when they probably should be investing. As an advisor, you have a simple tool to help them handle such uncertainty: You can educate your clients about dollar-cost-averaging. It is the simplest way to ensure that they proceed in a rational, rather than an emotional, manner.
By investing a fixed amount of cash into the market on a regular basis, clients are assured of buying more stock when it’s cheap and less when it’s expensive. By investing in this manner, they won’t be throwing their entire cash stash into the market but dribbling it in so risk is significantly reduced.
Explaining this to clients should help you calm their fears about venturing back into the market. It will make you look smart and make them feel more secure about investing. After all, everyone loves a bargain.
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