The following is an excerpt from the new Second Edition of Attract Clients that will be available soon.
There are times when the biggest difficulty you face in business is getting clients to commit their funds to an investment choice. Perhaps they agree with the concept of fee-based assets and even go so far as to say they want to place their money with professional managers, but then the question becomes not so much what to do or how to do it, but more importantly when. When is the best time to make the change and move the assets?
When asked about the best time to invest in the market, Warren Buffet said, “Whenever you have money.” Most of the time the market will be higher in the future from a present point in time; 60% to 70% of the time the market will be higher 18 months out than today so Warren Buffet is correct. The best thing you can do whenever you have money is to invest it.
That said, there are two types of money: money at risk in the past and money that was not at risk in the past. If we all had the risk profile and confidence of Warren Buffet to say, “I am setting these funds aside for an unlimited period of time and I will not worry because I will buy good companies and just hold,” then we could invest whenever we have the money. Unfortunately, this is not usually the case and we find that many investors are anxious. The stock market is a scary place for them. The funds they invest may never have been in the market before - a rolled over CD or GIC, or funds received from a business sale or real estate sale. These funds may also represent a large portion of a client’s total asset base. Therefore, prudence may encourage us to move into the market gradually. Some people like to put their toe in first and test the waters then gradually move in, while others are fine diving in. For “divers” the best thing to do is invest fully whenever they have the money. However, for the ones who want to wade in gradually, we created a model that assists your clients in adding funds to the market on a systematic basis.
I believe there are four important dates for the investment of new funds into the stock market. These dates are March 15th, June 15th, September 15th, and December 15th.
The dates are significant in that they precede the last two weeks of each quarter.
Something significant happens in the market during the last two weeks of a quarter called window dressing. When managers, investment advisors, mutual funds, and institutions liquidate underperforming positions, selling is the order of the day. This practice presents an ideal time for investors to add funds to the market as the institutions are in sell mode.
The dollar-cost averaging model starts with today’s date. If the client agrees the investment is a good thing to do, then they put 50% of the money in the market today. Then you determine future investment dates. For instance, if today’s date is February 20th, then select March 15th and June 15th as the remaining two date lines. Half the remaining assets, 25% of the total, will be invested into the market on each of these two dates.
Three scenarios can occur in the market after the initial investment of half the assets. Historically, over an 18 month period, the market tends to be up about 70% of the time. The other 30% of the time, the market could be down or flat. If we are bullish and think the market will be up in the future, it would be foolish to hold back part of the funds and wait to invest them later at a higher price. But what if we take a large portion of a client’s assets and invest today and then, in 2 months, the market drops significantly? The investment timing seems imprudent and the client might be upset. By using the Dollar-cost Averaging model a disciplined approach to making the investment decision of adding funds to the portfolio is established.
In my practice, when a pool of money accounts for 25% or more of a client’s existing assets, the Dollar-cost Averaging model was presented to the client as an alternative to investing all funds at once. If the client agreed, we immediately invested 50% of the assets in the market that day. We then determined the next two investment dates and allocated 25% of the total to be invested on each of those days. The client gave us a market order for those specific dates. My team wrote the order tickets for those dates, but the tickets were not dated for reasons I will explain shortly. My service assistant kept a folder for each of the four important dates: March 15th, June 15th, September 15th and December 15th. When a predetermined date arrived, all order tickets in that folder were executed.
Assume a client has $100,000 to invest, a large portion of their current assets. They agree to invest 50% today, 25% on March 15th, and 25% on June 15th. However, during the period between today and March 15th, the market pulls back and drops 9% below the previous quarter. That means the designated funds can buy at a 9% lower price than originally paid. It is not March 15th yet, but because the market is down 9% from the previous quarter, the folder of order tickets for the next important date are executed now. It is important to note that we never took discretion and contacted clients by phone to explain the opportunity to buy in earlier at a reduced price and to obtain their authorization. If you take discretion in client accounts, you can explain this possible scenario to the client up front.
Along comes March 15th. Since we already invested the funds, we do not do anything until the next quarter’s investment date. The market continues to go up. By June 15th, the market is higher. That is alright though because the client understood in advance that 70% of the time they would pay higher prices.
On average, the market may drop 9% inter-year about once every 18 months. If the market drops 18% inter-quarter, take the next two investments, the remaining 50%, and invest them both early. Over the last decade we invested near lows of the cycle by using this model.
When an investor is nervous, the Dollar-cost Averaging model is the best way to get their money into the market. Dollar-cost averaging renders a disciplined approach and the potential to pay significant benefits by investing at or near lows of the period. Even if you do not reap the additional benefit of investing at a lower price, the client still benefits by investing over time without missing the opportunities of a market that on average is up more often than down.