A Small Reminder about the Benefits of Dollar Cost Averaging

//A Small Reminder about the Benefits of Dollar Cost Averaging

A Small Reminder about the Benefits of Dollar Cost Averaging

I have recently been in the process of consolidating some accounts.  First up was altering up our cash flow chart to better reflect our current situation.  Second, was bringing all of The Wife’s assets over to Fidelity.  Part of that was moving assets she had with me, as an investment advisor (not husband) at my broker-dealer, and the other part was getting her Disney Stock registered in Fidelity’s name rather than the physical certificates that were sitting in our kitchen.  Lastly, I had to help her move her Roth IRA from her T.Rowe Price Account over to Fidelity.  It was during this very easy move that I was reminded about the power of Dollar Cost Averaging when combined with the simplicity of index investing.

What is Dollar Cost Averaging?

According to investopedia dollar cost averaging is,

The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.

In The Wife’s particular situation we were buying $50 of each of the following no-load funds:

  • Equity Index 500 (PREIX) – The investment seeks to track the performance of a benchmark index that measures the investment return of large-capitalization U.S. stocks. The fund attempts to match the investment return of large-capitalization U.S. stocks by seeking to match the performance of its benchmark index, the Standard & Poor’s 500 Stock Index (S&P 500).
  • T.Rowe Price Dividend Growth Fund (PRDGX) – The investment seeks dividend income and long-term capital growth primarily through investments in stocks. The fund will normally invest at least 65% of its total assets in stocks, with an emphasis on stocks that have a strong track record of paying dividends or that are expected to increase their dividends over time.

The Index fund has an expense ratio of .28% and the Dividend Growth Fund had an expense ratio of .66%.

So on the first of every month $100 would come out of our checking account and purchase shares of the two stocks.  The amount of shares would be a function of the share price on the date of purchase.

A Good Reminder of the Power of DCA with Low Expense Funds

The Wife and I don’t really look at her accounts and my accounts when it comes to our net worth, but this was a pretty boring account so other than to just update the net worth posts I largely ignored the account.  At $100 per month it isn’t a lot of money, however, as important, it is on auto-pilot…what’s to look at?

Well that $100 per month has added up over the past couple of years! Without any pain to current lifestyle.

RothIt appears I helped The Wife start this account in September of 2008 (about a month after I started this Blog as well as the beginning of a pretty ridiculous bull run).  So far we saved $7,000 without even really feeling it and with growth and dividend distributions the account has drifted upward to $11,885.  Is it retire now money, absolutely not.  But is it a nice account to have that takes absolutely no space in one’s day to day thoughts? That provides zero stress? Yes.  Our main “qualified” savings are in my 401k with a contribution and a match much higher than The Wife’s Roth IRA, but nevertheless I think starting in January of 2015 I will increase the contribution amount starting in January of 2015.

Dollar Cost Averaging Savings or Investing Works For Most People

While my inspiration for this post was an investment account, I absolutely believe small, constant transfers into different savings accounts would help most people who have trouble saving.  If you don’t have this type of set up yet, it literally couldn’t be easier with all the banking advancements in the past 5 or 10 years (however, this idea is far from new – Benjamin Graham discussed the idea in the early part of last century).

 

By | 2015-01-05T16:48:55+00:00 November 17th, 2014|Investments|0 Comments

About the Author:

Evan is the owner of My Journey to Millions which was started to track his journey from a broke debt ridden law school graduate to building a positive balance. Need more Evan? Follow him on Twitter, Contact him or get new posts directly to your email

Leave A Comment