Author: Paul A. Carl, CHSA, CPFA™Vice President, Retirement Plan Consulting, Registered Representative
While my goldendoodle, Bear, lays by my chair snoring, I’m thinking about rollercoasters. Why am I thinking about rollercoasters? Because I’m recalling a graphic around 2008/2009 that depicted a side-view of rollercoaster tracks. It showed a rollercoaster’s upward climb, its peak and then its descent to the bottom where it reversed course and began its ascent once again.
The rollercoaster graphic was meant to represent the investment markets which can go up and then down and then up and then down…It also illustrated the effects of human emotion and dollar cost averaging with the rise and fall of the investment markets.
From an emotional lens, who doesn’t enjoy checking their account balances frequently when the investments are mostly going up? Conversely, who completely shuns looking at their statements when investments are swinging in the opposite direction?
As for dollar cost averaging, the technical definition reads something like this: “An investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase.”
In more familiar terms, dollar cost averaging happens when funds are added to the same investment(s) in a systematic and regular interval. Interestingly, it can remove emotion from the investment decision because sometimes the investor is buying on the way up to a peak, and other times the investor is buying on the way down to a bottom where it reverses course once again.
When you contribute to your 401(k) plan throughout the year, you are dollar cost averaging. Each pay period, your employer forwards your contribution amount to the retirement plan recordkeeper. The recordkeeper invests your contributions in the investment options you have chosen or in the retirement plan’s default option. When investments rise in value, you are buying fewer units or shares of the investments; when investments decline in value you are buying more units or shares. Over time, the contributions that get invested are dollar cost averaged.
Are you using dollar cost averaging to your full advantage?
The content of this blog is offered by HORAN Wealth Management, an SEC registered investment advisor. This information is not intended serve as legal advice or as a substitute for the advice of your own counsel and should not be relied upon as such, as the advice appropriate for you will be dependent upon the particular facts and circumstances of your situation. We provide links to other sites that we believe may be useful or informative. Any links to third-party sites, or information therein, are not intended as and should not be interpreted by you as constituting or implying our endorsement, sponsorship, or recommendation of the third-party information, products, or services found there. Neither the information nor any opinion expressed constitutes a solicitation to use our services or to purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results. Market conditions can vary widely over time and there is always the potential of losing money when investing in securities. HORAN and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.