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Friday, May 29th, 2015


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Dollar Cost Averaging is Sound Investment Strategy

If you have stopped into a bookstore or newsstand over the last 18 months, you have probably seen them.

"How to rebuild your nest egg."

"You can still retire in 10 years."

If you haven’t figured it out yet, it’s investment magazines. And the advice can be good, if you are 52 years old, 5 years from retirement and your 401(K) has gone from $800,000 to $50,000.

But what if you are just starting your career or have been in the workforce for only a few years? You’ve been socking money away each month in your company’s retirement plan or Roth IRA only to watch it go down, down, down. What do YOU do?

Well, here’s my advice, "You could not have picked a better time to be young and investing." If you have pulled your retirement plan out of the stock market or thinking about it, please do yourself a favor and finish reading this article.

No, I’m not crazy and let me explain why. There is this investment strategy called dollar cost averaging and it should make you very happy in the years to come. The best part of it is, you are probably using this strategy and do not even realize it. Let’s go further with dollar cost averaging.

How Dollar Cost Averaging Works

Dollar cost averaging works like this; systematic investments are made to an investment account. For this example we will say on a monthly basis. To keep things simple we will also say that the investment account is allocated 100% into one growth fund. We will use $100 as the monthly investment amount. Now, depending on how the market is doing that fund’s price is going to fluctuate from day to day. So let’s look at a six-month example in the table below.

Month

Price

Shares Purchased

1

20

5

2

16

6.25

3

10

10

4

5

20

5

10

10

6

25

4

In the example above, you have invested $600 and your account is now worth $791.73. Over the six-month period, you paid an average of $14.33 per share. If you would have taken all $600 and purchased the shares at the beginning of the six months, you would have purchased 30 shares and your account would now be worth only $750. For this example, using dollar cost averaging has increased your account by over 5%! Of course the above scenario is just one example of using dollar cost averaging. There are many.

The most important point to take from all of this is that you are young and at a tremendous advantage. Why do I say advantage? Check this out.

How Dollar Cost Investing Can Benefit Young Investors

Let’s apply dollar cost averaging to the S&P 500 Index over the last 28 years. I am using the S&P 500 because it is a measure of the general direction of the overall stock market. Also, I am using 28 years because 1974 was during one of the longest recessions in recent history . At the end of September 1974 the S&P 500 was at 63.54. At the end of July 2002 the S&P 500 index was at 911.62. That means the S&P 500 has returned over 1,300% since September 1974. Now I’m not saying that we can all retire 28 years from now, but what it does show is that systematic investments early and often can reap great rewards from future growth.

Patience and persistence can go a long way in investing. Dollar cost averaging is just one strategy to help you build a solid foundation for retirement. Please remember that if you do not feel comfortable managing your investments, there are professionals to help you build your future.

Copyright © 2004 Hisson Investment Management

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