| Dollar-Cost Averaging continued... |
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| Does It Really Matter To You? |
| Our examples have all assumed that the decision is yours to make--invest a large lump sum now, or slowly dole out your money into the market. In the real world, that's a choice that many investors don't have. If your primary investments are made via your 401(k) plan, you're probably dollar cost averaging by default, as your employer socks a fixed portion of each paycheck into the market. So what good is it? Think back to our shopping example. Few people would stock up on any item just because the price just went up by 20%. They're much more likely to buy something that is being sold at a 20% discount. When it comes to investments, however, many folks are often reluctant to do the same. Investors often chase past returns, buying their fund (or stock) shares after the prices have jumped, while avoiding the market (or even selling their shares) when prices decline. This seems illogical, but it happens all the time. Dollar-cost averaging is something that you don't necessarily have to think about, but it will make you a disciplined investor, and it prevents you from making the mistake of chasing hot returns, or trying to time the market. Dollar-cost averaging is also a crafty way to invest in some great mutual funds that might be inaccessible otherwise: Many fund companies will waive their minimum initial investment requirement if you set up an automatic, monthly investment program. |
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| Our Last Observation |
| Some investors consider its ability to dampen volatility to be the primary benefit of dollar-cost averaging. However, the payoff from dollar-cost averaging can be greatest with an aggressive investment vehicle. In theory, you'll have more opportunities to buy shares during downswings than you would with a more staid vehicle, and you'll end up with a greater number of shares for your money. |
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