Dollar cost averaging is a time-tested strategy to build wealth for retirement over the long run. While simple in concept, many investors don’t fully grasp the mechanics and advantages of dollar cost averaging.
In our latest podcast, I explain exactly how dollar cost averaging works and why it’s such a powerful tool for retirement savers.
What is Dollar Cost Averaging?
Dollar cost averaging involves investing a fixed dollar amount on a regular schedule over time. This allows you to buy more shares when prices are low and fewer when they’re high – averaging down your per share cost.
For retirement accounts funded through payroll deductions, like 401(k)s, dollar cost averaging happens automatically. A set amount is invested from each paycheck into chosen funds.
The Benefits of Dollar Cost Averaging
Studies show dollar cost averaging leads to lower average costs per share versus trying to time the markets. You’ll buy more shares on sale by sticking to the consistent investing schedule.
Dollar cost averaging takes the emotion and guesswork out of investing. By committing to a steady monthly rhythm, you avoid the temptation to chase returns or sit on the sidelines.
Dollar Cost Averaging In vs. Out
While dollar cost averaging works well when accumulating assets, the strategy changes when drawing down assets in retirement. Sequence of returns risk comes into play, which we’ll cover in a future post.
If you have a workplace retirement plan, stay the course with consistent contributions. If you have other funds to invest, consider setting up automatic monthly transfers into your portfolio. Dollar cost averaging is a proven way to build your nest egg over time.
For a review of your full financial plan and investment strategy, please reach out to our office. We’re happy to help you make smart decisions to achieve your retirement goals.