How dollar-cost averaging enriches your retirement plan

|tab|

Your company's retirement plan provides you with a number of benefits. You probably know about many of them, such as tax-deferred savings, flexibility, and convenience. One advantage that you may not be aware of is dollar-cost averaging. Dollar-cost averaging is an investing strategy that can help reduce the risk of "bad timing."|ret||ret||tab|

|ret||ret||tab|

What is bad timing?|ret||ret||tab|

Ideally, investors should always buy at the lowest prices and sell at the highest. However, no one knows for sure what the financial markets are going to do tomorrow, next week, or next year. Bad timing occurs when an investor buys an investment at a high price, only to see the price drop later, or sells an investment at a low price that later increases.|ret||ret||tab|

|ret||ret||tab|

Eliminating the guesswork|ret||ret||tab|

Dollar-cost averaging is the strategy of investing a fixed amount of money at regular intervals. Let's say you decide to invest $100 a month in a particular portfolio until you retire. You make your $100 investment whether the price per share is up or down. |ret||ret||tab|

By doing so, you avoid trying to "time the market" the attempt to invest when market conditions are favorable. It may not seem to make sense to invest during an unfavorable market. But, since you're investing a fixed amount, your money buys more shares when prices are low and fewer shares when prices are high.|ret||ret||tab|

John puts $100 in his retirement plan portfolio each month. For six months, the share price of the portfolio fluctuates from $25 to $10 with an average price of $17.50. Because John used dollar-cost averaging, his average per-share cost was only $15.38. The accompanying chart demonstrates how dollar-cost averaging can lower the average cost per share.|ret||ret||tab|

|ret||ret||tab|

Reducing the risk of bad timing|ret||ret||tab|

Retirement|ret||ret||tab|

Plan Price Shares|ret||ret||tab|

MonthInvestment Per Share Purchased|ret||ret||tab|

1$100 $20 5 |ret||ret||tab|

2$100 $25 4 |ret||ret||tab|

3$100 $20 5 |ret||ret||tab|

4$100 $10 10 |ret||ret||tab|

5$100 $10 10 |ret||ret||tab|

6$100 $20 5 |ret||ret||tab|

|ret||ret||tab|

|bold_on|Total$600 39|bold_on||ret||ret||tab|

Average Price Per Share: $17.50|ret||ret||tab|

John's Average Cost: $15.38|ret||ret||tab|

|ret||ret||tab|

This is a hypothetical example for illustrative purposes and does not represent the results of any investment plan in any portfolio. Your investment results will differ. Source: NPI.|ret||ret||tab|

|ret||ret||tab|

Dollar-cost averaging vs.|ret||ret||tab|

Lump-sum Investing|ret||ret||tab|

Lump-sum investing is just what it sounds like an individual invests a lump sum of money at one time. Lump-sum investors often use the strategy of market timing. While this strategy can lead to better results, the risk of investing at the wrong time is great.|ret||ret||tab|

Jane is a retirement investor who decides to put her money in the same portfolio as John. She invests a lump sum of $600 during the first month and nothing for the next five months. |ret||ret||tab|

The investment value of Jane's account fluctuates as the share price increases, decreases, and then increases again. Jane's investment value at the end of six months is still $600. |ret||ret||tab|

John's account, on the other hand, steadily increases over the six months as he invests $100 each month. |ret||ret||tab|

Because John could purchase more shares when the portfolio's share price was low, his account ends the six-month period with $180 more than Jane's lump-sum account.|ret||ret||tab|

|ret||ret||tab|

Dollar-cost averaging vs.|ret||ret||tab|

lump-sum investing|ret||ret||tab|

John's |ret||ret||tab|

Dollar-cost Jane's|ret||ret||tab|

Averaging Shares Lump-sum Shares|ret||ret||tab|

Investment John Price Investment Jane|ret||ret||tab|

Value Purch. Per Share Value Purch.|ret||ret||tab|

|ret||ret||tab|

1 $100 5 $20 $600 30 2 $225 4 $25 $750 0 3 $280 5 $20 $600 0 4 $240 10 $10 $300 0 5 $340 10 $10 $300 0 6 $780 5 $20 $600 0|ret||ret||tab|

|ret||ret||tab|

This is a hypothetical example for illustrative purposes and does not represent the results of any investment plan in any fund. Your investment results will differ. Source: NPI.|ret||ret||tab|

|ret||ret||tab|

Your retirement plan works for you|ret||ret||tab|

Whether or not you realize it, you have been using dollar-cost averaging through your company's retirement plan. |ret||ret||tab|

Each pay period, your savings are deducted from your paycheck and invested in your retirement account. |ret||ret||tab|

That's how simple dollar-cost averaging really is! |ret||ret||tab|

It's a strategy that succeeds and is one of the reasons your retirement plan works for you.|ret||ret||tab|

|bold_on|(David Compere is a vice president and trust officer with Springfield Trust Company.)|ret||ret||tab|

[[In-content Ad]]