Dollar cost averaging (DCA) involves the systematic purchase of securities over time. This process of contributing regular periodic amounts to your investment accounts has many advantages. The real advantage of DCA is to invest continuously and automatically, without any consideration to timing the market. Meeting your contribution goals, whether for retirement, college, or reserve savings, is the most important part of your personal financial plan. Making regular contributions is the most effective way to ensure you meet your contribution targets.
In December, we discussed the IRA contributions limit and making sure that you are on track to max out your retirement plans (see our recent blog post “19 More Business Days to Max Your 401(k) Contributions!”) The IRS increased the limits this year for cost-of-living adjustments, which means that if you have not already, you will need to increase the amount you are having withheld each pay period to max out your retirement plan by the end of the year. Having your contributions deducted throughout the year is a great way of utilizing dollar cost averaging (DCA) for investing your retirement funds.
We anticipate more volatility in the equity markets in the coming year. Looking back at the last three years, volatility has been below average, but fortunately not back at the levels of the great recession. The stated benefit of DCA is to purchase more shares when the market is lower and fewer shares when the market is high, helping to take advantage of the volatility in the market. So next time the market is falling, remember that your regular contributions are buying more shares, lowering your overall average cost, and helping you meet your goals, especially when the market goes back up.
Kim Butler, CFP®
Associate Financial Planner