Most of us who have savings in our retirement plan are probably investing them in mutual funds. The stock market always fluctuates causing the mutual fund share prices to change periodically. Trying to time it so you can buy when it is low would be really hard for most investors. Please keep in mind that investing in mutual funds is just like in running a business where your goal is to buy low and sell high to make a profit. One method that experts recommend is to alleviate the market fluctuation problem is to buy shares using the dollar cost averaging (DCA) strategy.
Dollar cost averaging is a wealth-building strategy that involves investing the same amount of money at regular intervals over a long period of time. It is one way to even out the fluctuations in mutual fund’s share prices. The outcome of the dollar cost averaging is that you are able to buy more shares when the share prices are low but fewer shares when the share prices are high. The idea behind this strategy is to avoid making a one time lump-sum investment at the wrong time (when the share prices are high) and allows you to have the opportunity to buy shares at varying prices instead of just one price.
If you are already enrolled in a company retirement plan such as a 401k, 457, 403b, chances are that you are already using this strategy since retirement savings are taken out of your paycheck and are invested in your plan on a monthly basis. However, if you have a non-employer sponsored retirement plan such as an IRA, Roth IRA or self-employed plans, you may need to make sure that you employ the strategy by allowing your banking institution to deduct a fixed amount every month and invest it in mutual funds. It should be noted that when making a contribution to an IRA, you can invest a one-time lump sum of $3,000 in one year or spread it out by investing $250 per month.
Let’s look at the following hypothetical scenario. Assuming that you can invest $3,000 on your IRA, a non-sponsored plan and you have a choice between buying one time and spreading it out over 12 months.
Scenario 1:
One time lump-sum investment of $3,000
| Month | Amount Invested | Share Price | No of Shares Purchase |
| January | $3,000 | $10.00 | 300 shares |
Scenario 2:
12 equal monthly payments of $250
| Month | Amount Invested | Share Price | No. of shares purchased |
| January | $250 | $10.00 | 25.000 |
| February | $250 | $9.50 | 26.316 |
| March | $250 | $9.75 | 25.641 |
| April | $250 | $9.85 | 25.381 |
| May | $250 | $10.16 | 24.606 |
| June | $250 | $10.31 | 24.248 |
| July | $250 | $10.05 | 24.876 |
| August | $250 | $9.35 | 26.738 |
| September | $250 | $9.64 | 25.934 |
| October | $250 | $9.00 | 27.778 |
| November | $250 | $11.25 | 22.222 |
| December | $250 | $10.49 | 23.632 |
| Total | $3,000 | Average Share Price is $10.34 | Total No. of shares purchased is 302.57 shares |
You see, with a one time lump sum, the person was only able to buy 300 shares while the person who bought over the 12 equal monthly payments resulted in more total shares. However, this may not be the case all the time as sometimes a one time lump sum could actually generate more shares.
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