In need of money for his family, Arrested Development’s Michael Bluth visits his father in prison. “There’s always money in the banana stand,” George Bluth Sr. tells his son in the second episode of the cancelled Fox sitcom. The advice comes across as a sign of confidence that the family’s beachside frozen-banana business can provide them with sustained income.
This assumption, we learn, is wrong, after George Sr. finds out that Michael helped burn down the stand to prove he’s independent; its walls were literally lined with $250,000, now floating in the atmosphere above Orange County. “How much clearer can I say,” he says, grabbing Michael’s collar as the news sinks in, “there’s always. Money. In. The banana stand.”
This weekend, Netflix will breathe new life into Arrested Development, more than six years after Fox shuttered the show. The return of the Bluths and their beachside frozen-fruit stand comes to the delight of the show’s cult followers, but it also serves as a reminder of George Sr.’s flawed financial planning: Don’t save your money in ways that can go up in flames.
It’s normal to want to invest your dollars in a lump sum at the market’s bottom, but there’s always the risk it will fall further. In other words, if you put all your cash in the banana stand at once, there’s a chance you’ll get burned. One way to reduce this risk is a proven investing strategy that lets you come out on top over time – dollar cost averaging. The method is simple: Invest a consistent, regular amount into your holdings and don’t let market swings take hold of your emotions.
“It provides a systematic, disciplined way to add to your investment portfolio and make volatility work for you,” says Darren Coleman, vice-president and portfolio manager with Raymond James Ltd. in Toronto.
Usually used for more volatile investments such as stocks, through DCA you invest a fixed-dollar amount on a regular basis – say, monthly. If the stock price is low that month, you buy more; if it’s high, you buy less with the same amount. “By having the discipline to do that, the math tends to give you a lower average cost,” Mr. Coleman says.
The strategy removes the temptation to jump on market movements, whether you’re starting your investing life or building your portfolio. “We can’t predict the future, so attempting to wait until the price is right doesn’t work very well,” he says. “It tends to take away a lot of the worry and stress of investment.”
Some will argue that this leads to too many missed opportunities in the market, but one of the biggest points of DCA is to get rid of that nagging worry. “It takes an emotional layer out of investing,” says Cameron Sievert, wealth adviser with ScotiaMcLeod’s Cordes, Lisi, Sievert Wealth Management in Toronto. “We take the approach that we’d rather give up a little of the upside potential if we can mitigate out some of the risk.”
DCA can take further stress out of investing if you take advantage of pre-authorized contributions, which take care of all of the legwork for you each month, paycheque or other regular interval. All you need to do is show up for the regular reviews with your investment adviser. “That’s an approach a lot of people take,” Mr. Sievert says.
That said, it’s always important to be in touch with your adviser and be aware of how your money is doing. “Communication is really important to remember,” he says.
When you’re having these conversations, make sure to ask whether there are other ways to get your money to work for you. Keep an eye out for strong blue-chip stocks with dividends that you can regularly reinvest to buy even more shares. “Building a foundation of the world’s best companies is a wise thing to do,” Mr. Coleman says.
There are other similar strategies that could work for you. The more complicated value average investing, which requires investing more when share prices fall and vice versa, might be for you instead, but requires much more active participation. DCA is not perfect, but it’s a smart way to start or expand your investments.
DCA, at least, is a valuable approach in risk-averse times. “Since the financial crisis, people are still very skittish,” Mr. Sievert says. “If we can take more risk off the table by taking this type of approach, clients are usually open to it.”
Which is at least more fireproof than, say, lining a banana stand with your cash.