“Slow and steady wins the race<\/em>“<\/p><\/blockquote>\n\n\n\n

What is Dollar Cost Averaging?<\/strong><\/h2>\n\n\n\n

Dollar Cost Averaging (DCA) is an investing strategy in which you invest a fixed amount of money at regular intervals so that your cost per share averages out.<\/p>\n\n\n\n

When the market goes down, your money buys you more shares and when the market goes up, your money buys you less shares. Eventually things average out.<\/p>\n\n\n\n

If you contribute to your employer\u2019s 401K plan, then you\u2019re already dollar cost averaging by automatically buying fund\/stock shares at different price points every pay period.<\/p>\n\n\n\n

Why Dollar Cost Average?<\/strong><\/h2>\n\n\n\n

Most of us don\u2019t have a ton of cash sitting around or a sudden influx of money which can be invested in lump sum. We rely on the money that comes in every paycheck for our saving and investing goals. For the typical long-term investor, DCA becomes a powerful mechanism to accumulate shares gradually, average out the cost per share and thus build a massive nest egg as the years goes by.<\/p>\n\n\n\n

My friendship with DCA<\/strong><\/h2>\n\n\n\n

I started off with DCA in Jan 2008 while contributing to my employer\u2019s 401K plan. Since then, I\u2019ve employed the DCA strategy to the index funds in my IRA, brokerage acct as well as my kids 529 college savings accts.<\/p>\n\n\n\n

I diligently keep adding to my portfolio at periodic intervals \u2013 every two weeks for my 401K savings and once a month for my IRA\/brokerage\/529 contributions. This helps me average out the share price and accumulate shares in an incremental manner. Plus, the dividends are reinvested automatically every quarter which further boosts the DCA regimen.<\/p>\n\n\n\n

I never sold a single index fund share because of what the market was doing. In fact, I love buying shares when the market dips because I get them at discounted prices which lowers my average cost per share. DCA has helped me accumulate significant gains over the years!<\/p>\n\n\n\n

Some Math<\/strong><\/h2>\n\n\n\n

Let\u2019s imagine that WOM<\/a><\/strong><\/strong><\/mark> is the ticker symbol of an ETF that tracks the performance of the total stock market like VTI<\/a> does. <\/p>\n\n\n\n

With DCA, we will invest $100 per month in WOM<\/a><\/strong><\/strong><\/mark> for 7 mths with a total investment of $700. With lump sum investing, we will buy $700 worth of WOM<\/a><\/strong><\/strong><\/mark> shares in one go and see what happens after 7 mths. <\/p>\n\n\n\n

We\u2019ll look at three types of market movements: 1. Upward move<\/strong> 2. Downward move<\/strong> and 3. V shape recovery. Downward and then upward move \u2013 back to square one<\/strong><\/p>\n\n\n\n