Are you investing inconsistently … or not at all? Inconsistent
investment can sabotage your retirement savings efforts. There’s a way to avoid
that problem: a strategy called Dollar Cost Averaging.
By investing equal dollar amounts on a regular monthly basis, you can plan to
build wealth in a way you can afford today.
DCA to the rescue. Many people think they can’t afford to invest – their
budgets won’t allow them to do so. DCA makes it easier. Arranging a monthly
salary deferral of even $100 into your 401(k), for example, can help you plan to
build wealth in a tax-advantaged way.
Remember, you won’t retire on the dollars you put aside today for retirement;
you’ll retire on the assets accumulated from those early dollars as a result of
investment and compounding. Most retirement accounts feature tax-deferred
contributions and tax-deferred growth – why should you wait to take consistent
advantage of that?
Look at it this way: you can't make retroactive contributions to a 401(k), so
each dollar you didn’t contribute last year is an opportunity you've lost
forever. Not to mention the opportunity for tax-deferred growth of those assets.
That’s one compelling reason to adopt the DCA approach.
Additionally, DCA ensures a constant flow of new money into the retirement
account. That factor alone may help you exploit current market conditions.
The DCA strategy is designed to lower cost per share. When you practice
Dollar Cost Averaging, you buy more shares when prices are low and fewer shares
when prices are high. So with time, you end up with a lower overall cost for
In last year’s market downturn, there were some great buys – quality companies
whose share prices had fallen to amazing lows. Through DCA, investors had a way
to exploit this buying opportunity and pick up more shares. For example, on
February 20, 2009, you could have picked up 107 shares of General Electric for
$1,000. A year earlier, the same $1K would have bought you 29 shares.1
In the downturn, the DCA strategy by no means guaranteed a great return in the
future – but it did offer investors a chance to position their assets for the
market rebound. And boy, has the market rebounded!
Speaking of market downturns and rebounds, Ibbotson Associates did some research
and found that a hypothetical investor who would have invested $100 a month in
Wall Street for 30 years starting in September 1929 would have seen that total
investment of $36,000 grow into a $411,000 nest egg by September 1959.2 Yes, the
crash of 1929 was an extraordinary circumstance – but didn’t the Great Recession
feel pretty extraordinary to you? This is a good argument for DCA for the
long-run stock market investor.
The DCA strategy makes sense for many. Right now, many Americans would be
hard-pressed to come up with a lump sum of say, $4,000 or $10,000 to invest. DCA
allows people to contribute equivalent amounts toward retirement savings a
little at a time.
The really great thing about it is how “automatic” it all is. By arranging, say,
regular salary deferrals into a employer-sponsored retirement plan or regular
monthly contributions to an IRA, you can go out and live your life and simply
get that quarterly statement showing your ongoing contributions to the account.
It is “off your plate” but never neglected.
Are you saving for the future using a Dollar Cost Averaging method? Talk to a
financial advisor today and see how convenient it can be for you.
These are the views of Peter Montoya Inc., not the named
Representative nor Broker/Dealer, and should not be construed as investment
advice. Neither the named Representative nor Broker/Dealer gives tax or legal
advice. All information is believed to be from reliable sources; however, we
make no representation as to its completeness or accuracy. The publisher is not
engaged in rendering legal, accounting or other professional services. If other
expert assistance is needed, the reader is advised to engage the services of a
competent professional. Please consult your Financial Advisor for further