The stock markets have been rising since March 2009. The average market expansion lasts about five years, so many experts believe we are due for a pull back. It’s all part of the normal market cycle. The current market phase is the peak phase which usually has more volatility in the price of investments.
So, what should you do if you are trying to build wealth now?
One great thing to consider is dollar cost averaging (DCA). DCA is an investment technique where you buy a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. It’s like saving into your 401(k) at work every payday.
Why is dollar cost averaging good?
Dollar cost averaging has two great benefits:
- If the market is moving up and down a lot, like it has been in 2018, DCA allows you to buy shares at an average cost that’s lower than the market’s average price. Here’s how: Since you buy the same dollar amount every time, when the price is low you buy more shares. And when the price is high you buy fewer shares. When you work the math, that comes out to an average purchase price per share below the average of all the prices for the shares.
- DCA is a systematic investment plan where you routinely save on a regular basis. The most common example is the 401(k) at work. When you commit to a systematic investment plan, you will likely save more over the coming year than you would otherwise manage. And often, once you establish a systematic savings plan, you will find it’s easy to continue and you will save money regularly without even realizing it.
Total shares bought:
- Lump sum = 800
- DCA = 832.59
Total account value at end of illustration:
- Lump sum = $8,000
- DCA = $8,325.94
NOTE: This chart is for illustrative purposes only and is not intended to represent the performance of any security. The illustration does not include commissions or fees. Past performance does not guarantee future results.
One of the biggest benefits for dollar cost averaging is that it helps you manage your own financial behavior. And most of us need help in that area.
Saving for retirement
A recent study from the Economic Policy Institute says that most Americans have not saved enough for retirement. The study found that the average family age 50 to 55 has $124,831 saved for retirement. Compare that to the target set by retirement-plan giant Fidelity Investments. They suggest you need 10 times your final salary saved in retirement in order to quit working for money.
The problem is that for most Americans, we really would much rather do other things with our money. For one thing, there are tons of cool things to buy. And another is the endless list of things our children need every month. In a recent study conducted by the asset management firm Schroders, only about 17 percent of Americans responding said that they would direct more money to investing instead of paying off debt, spending or saving at the bank.
Since most of us need to save more and since most of us don’t really want to, maybe we should set up a monthly dollar cost average program to save a little money so we don’t have to think about it. As a CERTIFIED FINANCIAL PLANNER™ professional who is my client’s advocate at all times – a fiduciary advisor – and an advisor who works only for my clients – a fee-only advisor, I’m happy to help you figure out where dollar cost averaging fits in your financial game plan. E-mail the office to set up a time to talk at firstname.lastname@example.org.
Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.