History has repeatedly shown that trying to time the market can be successful in the short term for some people but is a fruitless venture over the long term. Looking at the stock market as an example, the data is overwhelmingly compelling for this claim. Between 1998 and 2017, the stock market returned an average of 7.2 percent. If an investor had missed the top 20 trading days over those 20 years, their annualized return would have been just 1.15 percent due to poor market timing. The idea is to hang onto investments for a longer length of time since no one can predict when the next 20 greatest days will occur.
Fortunately, there is a more cautious approach that investors may use to limit or even smooth out the cost at which they invest without attempting to time the market. This method is known as dollar-cost averaging, and it may be used not just for stock market trading but also for investing in other asset classes such as open-end private real estate funds.
Dollar-cost averaging is a methodical technique where an investor divides the entire amount of capital they would want to invest in a specific asset by the number of periodic installments they would like to make, or investments, in that asset over time. This endeavor seeks to decrease the average asset cost of what they have invested by the time they have made all of their periodic payments and to limit the influence of asset pricing fluctuations on their total investment. The resultant dollar value for each periodic investment follows the periodic payment frequency decided by the investor (for instance, monthly, every three months, etc.).
The following illustration demonstrates the results of investing $1 million in a certain Fund using a dollar-cost-averaging strategy for the first three quarters of 2020.
In the preceding case, the investor invests at an average price of$9.59 per unit. Instead of exercising dollar-cost averaging, the investor would have invested the entire$ 1 million in the first quarter of 2020, resulting in a $10.00 average price per unit.
However, not all investors or asset classes can use the appropriate dollar-cost averaging frequency. An investor expecting to purchase small-cap technology companies in October 2020 may decide to dollar-cost average their purchase over the following 12 months due to the existing level of volatility and pricing worries in the IT sector. However, if the same investor decides to start investing in privately owned multifamily real estate in October 2020, they might do so using a different dollar-cost averaging technique than they would for their investments in technology companies.
With its four to six contribution windows throughout the year, the Fund enables investors to use a dollar-cost averaging strategy. The fund uses a diversified approach and has an evergreen framework with monthly re-pricing. The fund also has a dividend reinvestment program (DRIP), which allows investors to dollar-cost average and benefit from compounding gains by regularly reinvesting their monthly payouts back into the fund.
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