Dollar cost averaging or lump sum contributions?

[Guest K Johns]

I am rather new to the world of investing, so I'm trying to find the best way of doing things. Any help would be greatly appreciated. Here is my question:

Is it better to invest one lump sum of 2000 dollars every Jan to a Roth IRA or should I contribute 166 dollars per month? What would the difference be?

[John Olsen]

Actually, both techniques are dollar-cost averaging. Over a twenty year period, the second one will average 240 costs. The first one will average 20.

I prefer the lump sum technique, because (a) I don't know WHEN the market will "dip" any more than I know when it will rise suddenly, but I want to be IN the market when the latter happens, and

(B) I want all the TIME working for me that I can get. Of the three components of the accumulation equations (Payment, Time [Number of periods], and Yield), TIME is, by FAR, the most influential.

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

[John G]

John Olson's prior comments are right on target. TIME is your number one friend in investing. One of the great examples of this is the story of two imaginary brothers one puts money into the market on the absolute best day of the year (lowest S&P500 or Dow 30) and the other always buys on the highest point of the year. To paraphrase the results, after 35 years the average annual return of the "lucky" brother is about 11.5% and the unlucky guy is 10.5% annual return. The value of the accounts will be different, but both results are respectable. Time is the dominant factor.

As one who is new to investing, let me suggest a very simple approach for the first few years. Plug in your 2000 each year. For the first 3 to 5 years buy either (1) a very broad based index fund (such as Vanguards SP500) or (2) broad based stock fund (look at Consumer Reports, Money, Kiplinger for ideas on no load funds). Then let it work. You have good diversification. Its simple. You do not need to pay a lot of attention to it. You do not need to own six funds if your first choice is broad based. When the total $$ grow to $20,000 you may want to consider splitting the total into two different funds.

You don't have to be an active investor that makes weekly evaluations of market action to get off to a good start. Not everyone wants to study the stock market an hour or more each week. If you start to do everything on a monthly basis (your example) then you are going to have a lot of paperwork to check to make sure it is being done correctly. I would vote for the one annual contribution just to keep life simple.

The single best thing you can do right now is get started. Don't spend a lot of time trying to find the "best way of doing things". Perfection is not obtainable in the world of investing.