Dollar Cost Averaging - Autopilot For Investors


Dollar Cost Averaging - Autopilot For Investors

For some, roller coasters are a great way to get their regular dose of adrenaline. For others, it is a surefire way to send their lunch back to the cook using an airborne routing mechanism. If we humans were on a conveyor belt during our tour of the amusement park, we would be required to ride the Ferris wheel, the bumper cars, and the roller coaster - among other lessor stops. Autopilot would ensure that we would get the best bang for our buck and come away with an "I never would have tried that, but I am glad I did that" sort of experience.

Emotions Are Our Enemy 

Some of you may be old enough to remember the bear markets that reared their ugly heads in 1987, 2001, 2008, and (gasp) March of 2020. These events were chock full of investment experts touting their ability to predict the future - whether they be the top or bottom of the investment cycle. My advice when running across someone who thinks they know exactly what is going to happen and when is to grab your wallet and run! This is because it often takes DOZENS of correct decisions to statistically separate skill from luck.

Deer In The Headlights

When overloaded with the noise that is the internet and the constant stream of crucial headlines, our fight or flight reaction is often to simply freeze like a deer in the headlights. One way to help us get our boots unstuck from the muck is a very powerful investment technique called dollar cost averaging (DCA). DCA involves the systematic purchasing of securities at set times in the future. DCA has two main advantages over any attempts to "time" the exit and entry into markets: (1) it reduces the behavioral biases we humans exhibit in any financial decision, and (2) it automatically purchases more shares of each portfolio holding when prices are low and fewer shares when prices are high. This means that we get an effective discount on the purchase price over times when markets are choppy. And the best news is that you are probably already taking advantage of DCA by payroll deductions to your 401(k) at work.

Ignore The Noise

DCA allows us to ignore the noise and put our emotions on the sidelines until it is time for us to start cashing in on our systematically built wealth. The table below shows how the math works in your favor to purchase shares of the SPDR® S&P 500® ETF Trust (SPY) at a 0.31% discount to the average price over our last 12 monthly paychecks.

Close2022-09-30ContributionSPYShares
012022-10-31$500.00$386.211.295
022022-11-30$500.00$407.681.226
032022-12-31$500.00$380.821.313
042023-01-31$500.00$406.481.230
052023-02-28$500.00$396.261.262
062023-03-31$500.00$409.391.221
072023-04-30$500.00$415.511.203
082023-05-31$500.00$417.851.197
092023-06-30$500.00$443.281.128
102023-07-31$500.00$457.791.092
112023-08-31$500.00$450.351.110
122023-09-30$500.00$427.311.170
TOTAL$6,000.00$415.2914.448
Average$416.58-0.31%

The Best Time

The best time to start investing is/was (ahem) when you were born. The next best time is TODAY. Not  tomorrow. Not when it feels "safe" to start. Again, human nature works against us as we procrastinate against anything that seems overwhelming to our brains. Please do not confuse perfect with better. It is never too early - or late - to start building your financial future. Start TODAY!

Resources

Dollar-Cost Averaging (DCA) Explained With Examples and Considerations


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