Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 1
When you buy every paycheck in a 401k (or do the equivalent in another account), sometimes you buy high and sometimes low, but you buy more shares low, which is why "Dollar Cost Averaging" works.

When you put part of every paycheck into a 401K, you are NOT "dollar cost averaging". You are investing as much as you can as soon as you can.

"Dollar cost averaging" is when you have a big pool of funds and divide it into equal-size pieces, which you put into the market at regular intervals. It's market timing while blindfolded.

Look at it this way. You have $120K to invest in stocks/stock-funds/whatever, and you are NOT going to actually look at the market to see what's going on and attempt to time it intelligently. Invest all at once, or in 12 pieces of $10K each?

If you invest all at once: on the average over time, the market has gone up, so the intelligent thing to do is invest it now, not wait.

If you divide it in 12 pieces, pick up the first piece. On the average over time, the market has gone up, so the intelligent thing to do is invest it now, not wait. Now pick up the second piece. On the average over time, the market has gone up, so the intelligent thing to do is invest it now, not wait. Now the third piece... and it turns out the intelligent thing to do is to invest the whole $120K now.

(Dollar-cost averaging DOES lower risk as well as return... until the whole wad is invested. From there on you just have fewer shares and the same risk.)
Print the post  

Announcements

When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.