Dollar Cost Averaging?

[Guest jchen78@gmail.com]

Hi Again,

I have a new question, kind of unrelated to the one I asked a few days ago, so therefore new thread. Once I had a financial advisor tell me that it is better for me if I can afford it to contribute a whole lump sum to my IRA at the beginning of the year to do that instead of spreading out contributions throughout the year. His reasoning was that all of my money can realize its full potential for the year instead of partially (though that is optimistic to think it is potential to earn rather than lose), but I have my suspicions that he is used to saying that so he can get all of his commission up front at the beginning of the year instead of in little amounts throughout the year. But note that he is A financial advisor, not MY financial advisor, so he is not making commission off of me anyway. But then I read something about Dollar Cost Averaging and how it is better to spread out my contributions throughout the year? So which is right? Or is the difference even significant enough that I need to worry about it? I would be talking about investing in mutual funds rather than for example a volatile single stock.

[John G]

Reasons for doing it in January

Money is sheltered longer. You are not paying tax on the outside earnings throughout the year. There is no other "theory" about buying at the beginning of the year that has any impact here, its all about the shelter.

Dollar Cost Averaging Reasons

You don't have all the money to fund everything in January.

DCA boils down to buying a little more when the market/price is lower, a little less when prices are higher. No one I know can "time" the market successfully over the long haul... because it is hard to see turns and now when up is high and down is low.

DCA is a discipline. It commits you to investing on a continous basis. For some people, a monthly campaign of investing reduces anxiety, or fear of making a mistake.

Sometimes a monthly program - a check each month - allows you to start a fund with a lower minimum.

Conclusion

Its not a huge difference either way. If you have extra money at the begining of the year, I would go with January commitment of the max. If you are comfortable with a monthly program, chose DCA. Note, you can still put all the money in an IRA/Roth, then DCA by moving money slowly over from the cash or money market (internal to your IRA/Roth) to an equity fund.

[masteff]

John covered two of my three thoughts. 1) even if you fund it in January, you can put it in cash to start and then move gradually to investments during the year. 2) personally, I'd say put the money in when you have it (so if you have it at the first of the year, go ahead and do it). 3) if you spread it out over the year, the more automated you can make it the better, such as thru direct deposit or eft draft from checking (so you don't either forget to do it or try to second guess which way the market is moving).

Okay, a fourth thought: you're just starting out and are dealing with few thousand to start. At that level, dollar cost averaging has a smaller benefit (which goes to your last question of is it significant enough to worry about). You have to weigh the potential reward of doing it with the additional effort of doing it.

[Guest jchen78@gmail.com]

Thank you, all this info has been so helpful.