Investing can be an overwhelming decision for many people. You must consider your goals, time horizon, and the risk you are willing to take when choosing an investment. When analyzing these options and trying to match them with the perfect investment piece, many first-time investors experience paralysis trying to find a solution and implementing an investment plan. Setting up a “recurring contribution” plan can help implement an easy solution.
Recurring contributions create a consistent approach to investing. Dollar Cost Averaging helps take the emotion out of investing, by investing small amounts of money over time as opposed to saving up to make one large contribution while trying to find the perfect time to invest. Dollar Cost Averaging allows you to invest a small amount of money each period as share prices fluctuate. Historically, as markets trend upwards, these purchases create gains as the average purchase cost was made at a lower share price.
For example, Joe contributed $500 on the first of every month into Fund X. As the market moves, Joe’s $500 contribution remained consistent, but the purchase price he received, and number of shares purchased varied from month to month. By investing each month, Joe was able to purchase 117.17 shares of Fund X.
As illustrated below, even though the market and share price fluctuated throughout the year, Joe was able to consistently save for his retirement and have a short-term gain of over $400. This example does not consider any additional dividends that Fund X paid throughout the course of the year which Joe used to purchase additional shares. This type of dividend reinvestment plan helped Joe to increase the total number of shares purchased and his overall investment value.
Disclosure: This example is not based on an existing investment. It is solely for the purposes of showing how the price of a holding can change as the market changes.
Dollar cost averaging becomes even more important during times of volatility, allowing the investor to capture opportunities to “buy low” without trying to time the market to find the perfect day to invest.
Other additional benefits of dollar cost averaging include:
- Setting up a simple automatic savings plan to help achieve retirement or investment savings goals
- Risk-reduction through averaging out purchase price
- Reduces stress of trying to anticipate the best time to buy
- Fewer transaction costs through systematic investment plans
If you do not have recurring contributions set up and are interested in getting started with an automatic investment plan, feel free to reach out to our team fps@finplans.com or 317-882-7675. Our team of advisors are here to answer any questions you may have, and our mission is to help you implement a plan to help achieve your retirement goals.