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I'm 28 and have recently opened a Roth IRA (since my work doesn't offer me a 401K until I work here for a year). I'm planning to make a monthly deposit of at least $100 into the IRA every month when I get paid so I make sure I don't spend it.

My question: is there any benefits to waiting to amass more money before making a deposit? (Say making a bigger deposit of $300 every three months?)

I'm new here- sorry if this is a really stupid question!

Meowmixx
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My question: is there any benefits to waiting to amass more money before making a deposit? (Say making a bigger deposit of $300 every three months?)

I'm new here- sorry if this is a really stupid question!

Meowmixx


Since you are dollar-cost averaging with a fixed dollar amount per investment, you benefit more from shorter periods rather than longer periods. So, my advice is to deposit at the shortest interval possible. For example if you're paid twice a month or once every two weeks you might want to deposit $50 at each payday.

g2w
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My question: is there any benefits to waiting to amass more money before making a deposit? (Say making a bigger deposit of $300 every three months?)

Depends - there's a difference between depositing and investing. Depositing can mean that it's in the IRa so you can't spend it elsewhere. Investing means you've bought something within the IRA.

I manage my daughter's Roth IRA & she sends a $250 check to the brokerage every month. I don't necessarily buy something every month but the money stays in IRAville.

Also if you're starting now, mark the contributions 2003 as long as possible (check IRS pub 590 for the rules) so you have the full contribution available for next year, too.

rad
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congrats on thinking about your future already!! and remember, what you don't see, you don't miss. (ref. to automatic deposits)
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Take a look at this "Guide to the Roth IRA":

http://www.fairmark.com/rothira/index.htm

I've posted this link before but I think that it's worth putting on the board again.

I also believe that there is no advantage to amassing funds and only contributing to your IRA every three months or so. You had the right idea...contributing what you could on a monthly basis. It's a lot easier and Dollar-Cost-Averaging (DCA) is a proven practice.

Although $250 a month X 12 months = $3,000 (Max yearly contribution), do whatever your pocketbook will allow. The idea of "paying yourself first" works, so contribute as soon after you get paid as possible to avoid allocating the funds to something less important. I don't know who you have your IRA with, so I would check with them to see what their rules are. I know that Vanguard requires a minimum of $100 per contibution.

I also hope that you chose a passively managed, low expense, no-load, broad-based index fund as a starting fund (core fund) for you IRA. Something like the Vanguard Total Stock Market Index Fund (VTSMX).

Anyway, good luck...

Bill



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>>It's a lot easier and Dollar-Cost-Averaging (DCA) is a proven practice.

Could you explain why this is? I don't believe in DCA. I invest all my savings whenever I have money. How would I do things differently with DCA?

Thanks,

Nick
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Nick...

The basic theory behind straight Dollar-Cost-Averaging is that if you invest a set amount of funds on a regular (say monthly) basis, that you will buy more shares when the price is down and less when the price is up thereby achieving an average share cost that is generally better then if you had tried to time the market. This article explains it better:

http://www.americancentury.com/workshop/articles/dollar_cost_averaging.jsp

Hope this helps,
Bill
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Could you explain why this is? I don't believe in DCA. I invest all my savings whenever I have money. How would I do things differently with DCA?

Thanks,

Nick


Dollar cost averaging is a powerful mechanism to invest on a regular basis, as you do with your weekly salary.

It has the neat property that an investment can actually grow even if the stock price at the end is equal to the stock price at the beginning.

Consider this stock price history on a monthly basis:

Jan - 10, Feb - 9, Mar - 8, Apr - 7, May - 8, Jun - 9, Jul - 10

Assume you invest $100 each month so that the number of shares you buy each month is:

Jan - 100/10 = 10; Feb - 100/9 ~ 11; Mar - 100/8 ~ 13; Apr - 100/7 ~ 14

May - 100/8 ~ 13; Jun - 100/9 ~ 11; Jul - 100/10 = 10

Total Invested = 7x100 = $700
Total Number of shares = 10+11+13+14+13+11+10 = 82
Stock price at end = 10
Investment worth at end = 10x82 = $820
Profit = $120

Neat, huh ?

g2w


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Thanks for the info! So to harness the power of DCA, how would I change what I'm doing now, which is, as I mentioned, to invest all extra money as soon as I get it.

Nick
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Thanks for the info! So to harness the power of DCA, how would I change what I'm doing now, which is, as I mentioned, to invest all extra money as soon as I get it.

Nick


I puzzled over this quandary myself for a long time. I believe the best thing to do is to invest it as a lump sum, however...

You cannot predict what the market will do. However, late December is often a good time to put money into the market as year-end tax selling completes.

g2w
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My question: is there any benefits to waiting to amass more money before making a deposit? (Say making a bigger deposit of $300 every three months?)

That depends.

Generally, if you are investing in the stock market, the long-term trend is upward, so if one is predominantly a long-term buy & hold investor, the rule of thumb would be to get invested as much as possible as soon as possible. So, in this case, if $100/mo is what you can reasonably invest without having to go into debt, investing $100/mo is better than $300/quarterly. So, considering this, $100/mo is better.

However, if there are transaction costs, you generally don't want transaction costs to exceed 2% of the amount being invested. If there is no transaction costs to get your $100/mo into your Roth IRA, do so! But if there are transaction costs to get that $100/mo in the Roth IRA invested, you might want to allow the balance in the Roth IRA to build up to where you can make a purchase where the amount being invested is 50 times the transaction costs.

Generally, purchasing individual stocks or exchange-traded funds through a discount broker have commissions. But generally if purchasing mutual funds with the fund family as the custodian won't have transaction costs, but, depending on the fund, there may be loads, and there will be an "expense ratio" to cover the administration of the mutual fund--loads (sales charges, contingent deferred sales charges, and 12b-1 fees) and high expense ratios will eat into the returns, so consider the costs of the investments as well as what those investments are. If you are using an investment advisor, the loads help pay the investment advisor's wages.

Take the Roth IRA seriously--the fact that it is a Roth IRA means it has certain tax advantages. However, it is the investments inside the Roth IRA that have the impact (or lack thereof) of the growth of assets inside the Roth IRA.

For 2003, you can contribute a total of $3,000 aggregate ($3,500 if you are or will be 50 years old or older by December 31) to Roth IRA and Traditional IRA, e.g., you can contribute up to $3,000 to one or the other, or split it between Roth and Traditional, just as long as the Tax Year 2003 contributions don't exceed $3,000 (or $3,500 if 50 or older). The latest you can make your Tax Year 2003 Roth IRA contribution is April 15, 2004, so it is strongly recommended that you clearly label which year the contribution is for if you are sending your Roth IRA a contribution between January 1 and April 15. (Even though you can make your Tax Year 2003 Roth IRA contribution as late as April 15, 2004, you still must qualify based on Calendar Year 2003 income.)

If you haven't done so already, you may want to read "All About IRAs" <http://www.fool.com/money/allaboutiras/allaboutiras.htm?REF=PRMPIN>
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is there any benefits to waiting to amass more money before making a deposit? (Say making a bigger deposit of $300 every three months?)

Do you pay any transaction costs when investing money within the IRA? If the answer is yes, then perhaps waiting to put it in in bigger chunks would be preferred. Otherwise, a montly contribution sounds fine. I think there would be little benefit to putting it in on a more frequent (like weekly) basis.
My suggestion, all other things being equal, would be to put it in on whatever is best for you considering budgeting, pay periods, etc.

Bob
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Thanks for all the advice! I've got some reading to do!

Meowmixx
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Ok, thanks. My opinion is that DCA has no reason to exist, and you should just invest all you can as soon as you have it (obviously letting the amount build to certain point so the txn costs don't overwhelm the investment.) Whenever I hear someone trumpeting the virtues of DCA, I inquire a little further to make sure I'm not missing something.

Why DCA remains so popular, and the subject of endless articles by the financial community vs AYC (All You Can) investing is beyond me. So I'm supposed to use DCA to invest exactly $1000 per month. What if I have $2000 one month? I can't invest the extra $1000...that would be ruining the whole spirit of things!

Nick
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Why DCA remains so popular, and the subject of endless articles by the financial community vs AYC (All You Can) investing is beyond me. So I'm supposed to use DCA to invest exactly $1000 per month. What if I have $2000 one month? I can't invest the extra $1000...that would be ruining the whole spirit of things!

Nick


I'll tell you why it remains so popular. While the market plummeted from it Y2000 highs to its Y2002 lows, my 401k and my wife's 401k were consistently buying mutual funds all through this period.

The result ?

My wife's 401K and my 401K are at all time highs and over 30 % this year from ye 2002 (which isn't the low btw)

g2w
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>>>>I'm 28 and have recently opened a Roth IRA (since my work doesn't offer me a 401K until I work here for a year). I'm planning to make a monthly deposit of at least $100 into the IRA every month when I get paid so I make sure I don't spend it. <<<


Sounds like a great idea to me. In fact I would recommend it to any client. Wished every client's was as smart as you!


Buz Livingston
Registered Investment Advsisor
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Ok...so people who don't follow DCA presumably stopped investing during 2001 and 2002 for some reason? I just kept investing all I could.

DCA itself doesn't have anything to do with investing during a downturn. Obviously everyone should invest consistently. It's a math thing that shows investing a certain amount each month -regardless of how much you actually have to invest- might in some circumstances beat investing less methodically.

But it's easier for me to throw the fuzzy logic of DCA out the window and just invest as much as I can. Every time I read an article on it I just want to puke.

Nick
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But it's easier for me to throw the fuzzy logic of DCA out the window and just invest as much as I can. Every time I read an article on it I just want to puke.

Ouch! DCA is my favorite way to invest in the market (401K & Roth IRAs). Every time in the past I've plunked down a large chunk of change, it seems it has been close to a market top. Of course, I'm not the sharpest knife in the drawer, so DCAing in index funds (about as simple as you can get) works for me.

Gup
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I think one needs to distinguish between forced or natural DCA such as in a 401k funded by payroll deductions or budgeted investments where a dollar amount is regularly put in and the decision whether to DCA or invest lump sum new found money (think inheritance or lottery win). In the first case it is natural to DCA as the money becomes available. In the second case with a significant amount of money that suddenly becomes available there is a reasonable debate on whether DCA is appropriate and both sides have merit. The correct decision will depend on whether the market goes up or goes down during the investment period. And unfortunatly no one knows that until it is all over.

Bob
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But it's easier for me to throw the fuzzy logic of DCA out the window and just invest as much as I can. Every time I read an article on it I just want to puke.
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My advice would be not to read any more articles or discuss the merits (or lack there of) of DCAing in order to cure your chronic regurgitation problem.

Bill
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Ok...so people who don't follow DCA presumably stopped investing during 2001 and 2002 for some reason? I just kept investing all I could.

I DCA, but that is because it is part of my "systematic investing" plan, investing as money is available. I also use "systematic saving" to build up a money market account to have the full Roth IRA contribution waiting and willing to go for when I can next contribute to a Roth IRA (i.e., I am right now sitting on the $3,500 that I can contribute to the Tax Year 2004 Roth IRA contribution come January, 2004).

There are some good reasons to DCA, but maximizing the returns on investment isn't one of them:

1. By investing in "bite size chunks", one can become acclimated to normal market volatility. This seems reasonable for those who previously didn't have exposure to equities and how I first got my exposure to equities.

2. A systematic savings apprach: invest a fixed amount of money each payday. That is what I do with my 403(b) and taxable investments. (Sometimes if I have extra money or a windfall, I'll add those to my taxable investments.) By making investing routine and having the money automatically removed from my accounts and put where it will get invested, it gets done, which is far more valuable than spending the money on perishables and being left with only good intentions at the end of the month.

3. A risk mitigation approach: by making purchases spaced out over time, one reduces the risk that the entire amount will be invested when prices are high. This might be a reasonable approach if one is making a major portfolio change.

I remember reading that, as an income maximizing strategy, DCA falls flat: about 60% of the time, lump sum investing into the stock market (if one is suddenly presented with a lump sum, such as an inheritance) beats DCAing over 6 months--there is a wider spread of returns from lump sum investing (higher highs, but also lower lows), but when one looked at the median returns at the end of those 6 months, the returns from lump-sum has a higher median return.
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Author: yobria Date: 11/13/03 4:09 PM Number: 37806
>>It's a lot easier and Dollar-Cost-Averaging (DCA) is a proven practice.

Could you explain why this is? I don't believe in DCA. I invest all my savings whenever I have money. How would I do things differently with DCA?

Studies have shown that it is 'statistically' better to invest a lump sum all at once rather than DCA (Dollar Cost Averaging). This is because the market goes up more than it goes down. It just stands to reason that the sooner you get your money in, the more you will make, most of the time.

HOWEVER, this 'statistical' fact DOES NOT GUARANTEE that you will ALWAYS be better off by investing the lump sum. It only says that MOST of the time you will be better off investing the lump sum all at once.

Consider what can happen if a severe market downturn happens right after you invest a lump sum.

Example: If you had $100,000 to invest and you put it all into VTSMX (Vanguard Total Market Index) on 3/23/00, you would have bought in at at $35.54. Then, less than one month later, on 4/14/00, VTSMX closed at $30.00. That translates to a loss of $15,588 in less than a month. That might even be enough loss to make you pull the plug, which is what many people did at that time (in fact the selling is what makes the price go down).

The reason that most advisors recommend DCA is that it reduces the risk of losing a large amount right after making the initial investment, and most people agree that you cannot predict when a large downturn is coming.

In the example above, if the person had decided to DCA the $100,000 at $10,000 a month, the loss over the first three weeks would have only been $1,588, and the next $10,000 would be invested on 4/23/00 at $31.57 which buys more shares. Then on 5/23/00, another $10,000 at $30.38, which buys even more shares. And so on until the full $100,000 has been invested. DCA, in this case, would have saved this investor a lot of money, and he would have been in an ideal position for the upturn we have seen this year.

But, if this same person had decided to DCA his $100,000 in 1995 at the start of a huge bull run. You can run the numbers and see that he would have been far better off to invest the whole $100,000 at one time, to get all the dollars participating in the bull run for as long as possible.

Note: DCA is quite safe for investing in mutual funds or ETFs, but it can be very dangerous when investing in individual stocks. Remember Enron. Lots of people DCA'd into that stock while it descended to zero, and they lost everything.

So, you can see that DCA is a great way to reduce your risks when investing in the overall market. It will provide significant protection in the event of a downturn. Of course, protection is never free, and DCA will limit your gains in the event of a strong upturn.

There is a variation on DCA called 'Averaging Down' that you might want to consider when you believe the general direction of the market is down. To Average Down, you invest a fixed amount each month ONLY IF THE MARKET HAS GONE DOWN from the previous month. That way, you buy more shares each month as the market descends, but stop investing when it has gone up. Then, when you believe the general direction of the market is up, you invest the rest of the lump sum.

Russ
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In 2001 & 2002 I funded both my and my wife's Roth IRA's at the 1st of the year. Each year I took a beating. This year I DCA'd, but in hindsight I would have been better off funding them at the 1st of the year. Even so, after 2001 & 2002, I'm going to continue to DCA (don't puke Nick). For a working slug such as myself, it is just the best rum-dumb way to invest (my opinion).

Gup
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