A Reader in New York had a question regarding whether it is better to fully fund an investment, i.e. our IRAs, early in the year or spread out the investments over the course of the year to take advantage of dollar-cost averaging. Great question.
First, although we have fully funded our IRAs for 2011 we have not actually invested all that money. We use our IRAs for individual stock investments. We pick out stocks that we like based on our investment goals and then we try to buy same on down days via a limit order. We plan to hold these investments for at least 3-5 years or until they double in value.
Second, for our 401k contributions we contribute over the course of the full year. We do so for budgeting purposes.
Third, regarding dollar cost averaging. Our savings goals are really a savings snow-ball. I stay motivated with savings by working towards the goals and crossing them off as soon as possible. If I could fully fund our 401ks earlier in the year, I would do so.
I'm not an investment expert, but my goal is to get my/our money invested as quick as possible. Get that money working sooner rather than later. Here is an expert's opinion and explanation that sums up my feelings about this issue.
What say you? Are you pro dollar-cost averaging and if so, why?
2 comments:
Great article - thank you! I'm still partial to dollar-cost averaging however. Here's a 2010 article at Forbes that reflects my sentiments: http://www.forbes.com/2010/09/20/safe-investing-stocks-personal-finance-new-rules_2.html
A reader in NY
I lose out on company contributions if I don't dollar cost average in my 401K over the entire year. My employer lets me contribute up to 25% of pay into the 401K. They match 75 cents on the dollar on the first 8%. If I go high in my contribution % early in the year to fund it, I miss out on free money later in the year.
That said, once I max out my IRS limits for the year, my employee gives me the option to continue to contribute after tax dollars. So I have 22% taken out, each pay check all year long. It gets more expensive later in the year, when it switches to after tax dollars but the 401k continues to grow and I never see the funds so I don't miss it.
I tell my wife, the only down side of my plan is that I aggressively save now for a comfortable early retirement, but if I die early her next husband then gets to enjoy "my" wife and blow through my lifetime of savings. :-(
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