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Dollar Cost Averaging: Does it Work?
By JLP | July 27, 2006
John Waggoner of USA Today wrote a column recently titled Dollar Cost Averaging’s Not All It’s Cracked up to be. Here’s the main point of what Waggoner had to say:
“If you invest the same amount at regular periods, you’re using a technique called dollar-cost averaging. The advantage is this: You automatically buy more shares when the market is low and fewer shares when it’s high. For example, if you invest $1,000 in a stock fund at $34 a share, you get 29.4 shares. If the price falls to $27 a share, your $1,000 will now buy 37 shares.
All well and good. But dollar-cost averaging isn’t the panacea it’s made out to be. For example, if you had invested $100 a month in the Vanguard 500 Index fund for the past decade, you’d have had $15,437 in your account at the end of June, according to Lipper.
You’d have invested $12,000 in the fund, so your total profit would be $3,761, or 31.3%. Any gain is good, but 31.3% is a far smaller gain than 122% — the S&P index’s return in the past decade.”
My response: SO WHAT! The problem I have with articles like this is that they address problems that most people have no control over. I mean, what’s the average investor to do? It’s not like the average person can invest a lump sum. Most people have to meet their financial goals by saving a small amount on a consistent basis either through an IRA or 401(k) plan.
Topics: 401(k), IRAs, Investing, Retirement Planning |