Chris Lange
6 min read
Quick Read
-
Suze Orman warns that adding extra stock purchases every time markets drop reintroduces market timing, defeating the purpose of dollar-cost averaging.
-
A 20% loss requires a 25% gain just to break even, so retirees who sell during a downturn permanently destroy wealth they can never recover.
-
Orman’s rule: only invest money in stocks if you won’t need it for at least 5 to 10 years; shorter-term cash belongs in savings or Treasuries.
-
Americans who work with a financial advisor have saved more than twice as much for retirement, on average. Find out what one could change for you: SmartAsset’s free quiz matches you with up to three vetted fiduciary advisors in about five minutes. (Sponsor)
In the Oct. 25 episode of Suze Orman’s Women & Money, Suze Orman pushed back on a reflex many disciplined investors share. Her advice to listeners was straightforward. “You don’t have to think, oh, the markets went down, I have to dollar-cost average; now is the time. No, you don’t always have to do something.” Orman is a longtime personal finance author and broadcaster.
Her timing was good. The Invesco QQQ Trust (NASDAQ:QQQ) has fallen 8% over the past month after a sell-off in tech stocks. Investors are now bracing for more volatility. In a market like this, the urge to act costs money in two ways, as some people put cash they will soon need into stocks to catch the dip. Others sell near the low and lock in a loss.
Orman Gets This One Right, and the Math Shows Why
Dollar-cost averaging means investing a fixed dollar amount on a fixed schedule, whatever the price, so say you invest $500 a month, and the share price goes from $50 to $40 and back to $50.
You end up with 32.5 shares at an average cost of about $46. That is below the price in two of the three months.
——
Can You Answer These Three Questions?
Americans say they need $1.46 million to retire comfortably. Whether that number fits your life depends on three questions most people never work through:
-
1. How much can you withdraw each year without running out?
-
2. When should you claim Social Security?
-
3. How much will taxes take from your 401(k) or IRA?
A fiduciary advisor can answer all three using your real numbers. SmartAsset’s free quiz matches you with up to three who serve your area.
(Sponsor)
——
That is the point Orman is making. A regular schedule already buys more shares when prices drop. Adding extra purchases every time stocks fall turns the plan back into market timing, which is the very habit dollar-cost averaging exists to replace.
