Dollar Cost Averaging in Your 401k May Help You Sleep Better. Here’s Why.September 22, 2014 12:00 am
Since the end of 2009, the most common question I get is any variation of the following: “I think the market is too high. Should I wait until it comes down before adding money to my retirement plan?” Actually, this is the most common question since I’ve been in this business (Pre-2009).
My answer is quite boring and it doesn’t sound very clever or excitingly “Jim Cramer- like”: it’s Dollar Cost Averaging (DCA). Most of you who contribute to a retirement plan are already doing it. In short, it means buying a fixed dollar amount of an investment on a regular schedule. For example, when your company deducts $250 per week and adds it to your 401k, you are using the DCA strategy. Now, if you are Dollar Cost Averaging all of it to your 401k money market, well… we need to talk- or at the least, keep reading!
I like the DCA strategy because it takes the emotion out of investing. Whether the market is down 6% or up 15%, you keep buying shares. Over time this can lower the total average cost of all your shares. Simply put, when prices are high you buy fewer shares, but when they are lower you buy more. What a revelation! It beats being stuck in your money market month after month while you stress over when to “get in.” I’ve spoken with people stuck for years in cash. There’s not much we can be sure of in the investing world, but I can tell you this: the market will go up and it will go down. Trying to find out when to stop and start investing in your retirement plan is futile.
My fellow advisors and I have been saying for years: don’t try to time the market. Don’t trade on emotion. Most of the people I’ve run across that do these two things tend to pull out of the market when they are down due to fear. Then, excitement kicks in and they go back in after the market has rallied. So much for the “buy low, sell high” theory. The S&P 500 is up about 9.65% year to date, but I’m still buying shares. I’ll do the same next September too. So, try not to fret and just use DCA. I can’t promise you results, but you might sleep a little better not having to wonder “Do I get in now?”
This is a long term strategy, which should fit in well with your 401k/403b investing plan. I’m not referring to Lump Sum Investing (LSI). A LSI strategy may work well with a rollover or a lump sum of cash. Vanguard conducted a study in July 2012 which compared DCA and LSI with interesting results. But let’s save that topic for another day. This approach assumes you have a proper investment allocation in your 401k. DCA is a strategy and does not guarantee results or protect you from losses. As always, it is best that you consult with a Financial Advisor regarding your risk tolerance and your retirement goals.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Sean’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.