Dollar-cost averaging is a strategy that involves investing the same dollar amount in the fund on a regular basis. This is very similar to what you see happen in a company 401K.
We have done the math and calculated how much money you would have made if you had invested $500 per month in the S&P 500 for 31 years using dollar cost averaging vs holding your money and buying at the exact correct time. I likened the 2nd method to a market-timing strategy in which a psychic investor made 100 percent accurate purchase timings. For obvious reasons we know this would never happen and to add to the pain, when it comes to the stock market, the majority of people do the exact opposite of what they should do. When the stock market is genuinely the cheapest time to buy, you’re more likely to buy less because of what you see on the news. When the market is highest, people rush in near the top. But let’s assume you invest $500 at the exact right time starting in 1988. You would have approx. $1.23 million1. That sounds great but remember you need to be a psychic.
Now let’s look at dollar cost averaging into the market. If you had invested $500 per month in the S&P 500 with dollar cost averaging starting in 1988; when the S&P 500 is high, your money buys fewer shares, whereas when the market is low, it buys more. When it all settles out you would now have nearly $1.18 million1. So a little less than the perfect market timing but honestly more than one would think. Plus you don’t need to be psychic, and you get to live life and not have to watch the stock market every single day.
Dollar cost averaging is beneficial for three reasons:
- it removes emotions from the equation and forces you to invest like a robot.
- Instead of languishing in a bank account waiting for a better moment to buy, dollar cost averaging allows you to have all of your investable money invested at all times. When you put your money to work in the stock market, you get to share in all of the dividends and growth that accrues over time.
- Dollar cost averaging is effective because it is feasible. Unlike strategies that require you to time the market, dollar cost averaging is doable.
We never give investment advice on the internet because everyone’s situation is different but generally speaking dollar cost averaging is the great strategy to develop wealth slowly and steadily for people with any amount of time, education, or money.
To begin using dollar-cost-averaging, call us and we can help you open an account and set up a monthly transfer from your bank account. We will then invest your money as it comes in. You can sit back and let your investments run on autopilot.
This is not individual investment advice, please call us and we are here to help you with your unique situation.
1 Han, Rose. “Dollar Cost Averaging (DETAILED EXPLANATION).” YouTube, www.youtube.com, 26 Dec. 2019, https://www.youtube.com/watch?v=ZdJgJqEOOQ4&t=90s.
Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding the accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.
Stephen Pease, David W. Smiley and Matt Hoaglin are Investment Advisor Representatives with Dynamic Wealth Advisors dba Oxford Financial Planners. All investment advisory services are offered through Dynamic Wealth Advisors.