If you’re new to the personal finance game, you might not even know what ‘dollar cost averaging’ (DCA) means, so let me explain it real quick. All it basically means is strategically investing a predetermined amount of money on a specified time interval. Many people utilize the DCA method for their Roth IRAs.
Here’s a typical example…
Helga can contribute up to $5,000 this year in to her Roth. She could make a one time $5,00o contribution and put the Roth on the backburner ’til the next calendar year. There is a pretty big risk with this though. if she invests that $5,000 right before the market drops 1,000 points, she’d be up a creek without a paddle. Instead of a one time $5,000 payment, she could take that money and divide it by 12 months. This would leave her with a $417 monthly payment. If invests this $417 from January through December, she will still max out her Roth contributions, but will also mitigate any sudden drops in the market. Since she is buying on a specific day, and not a specific stock price, she is going to be more consistent and less emotional when it comes to investing. It’s generally a pretty good strategy.
I, however, am a PF rebel and do things a little differently. Instead of break my Roth IRA contributions over 12 months, I break them up over three payments. I typically make a $2,000 contribution, and two $1,500 contributions at sporadic times throughout the year. There is really no telling when I am going to invest. I rely on two basic principles. 1) Have enough liquidity so I can afford to contribute and 2) Invest just before I think the market is going to go up. Yes, the second option is just random guessing, but it makes investing a little fun.
I would totally be to down dollar cost average and make even payments each month, but I am faced with one tiny problem. IT WOULD BE WAY TO EXPENSIVE FOR ME. When I first opened up my Roth, I didn’t know what the heck I was doing. I decided to open it with Wells Fargo. This ended up being a mistake. Not because Wells Fargo sucks (they’ve actually been quite pleasant), but because I didn’t pay attention to the fact that Wells charges a $35 fee for each trade I make. This would cost me $420 in fees ($35 x 12 = $420). That’s a whole extra payment!
This is why I make as few trades as possible… one for each fund I own. I am still getting charged $105 for those three trades, but I’ll grin and bear it for a short while longer. All Wells Fargo customers with account balances over $25,000 are deemed premier account holders. This comes with a few perks, the most important being 100 free trades a year. My Roth currently sits at $14,000. So after two more years of contributions and a small improvement in the market, I should hit the premier status and avoid those pesky trading fees. Once I’ve reached baller status, I’ll mix my investing game up and join the 12 month dollar cost averagers.
For those of you that dabble in the stock market, do you mess around with dollar cost averaging? What’s your strategy? Set payment each month? Random payments when you think things are on sale? Did you even know what dollar cost averaging was before this post? Did you hate that I actually wrote about something finance related?