Dollar cost averaging is a common investing approach that has proven itself over long time periods. Put simply, dollar cost averaging means consistently and systematically investing money into an investment. One of the main benefits from dollar cost averaging is that it removes emotion from the investment decision. By consistently purchasing an investment that is expected to go up over time (the S&P 500 is the most common), the investor spreads their purchases out over time, reducing the risk of buying at tops and selling at lows.
At Athos Capital Advisors, we’ve looked back over the past 30 years and analyzed three different dollar cost averaging approaches in an effort to guide our clients on the best approach going forward.
- Invest full contribution at the beginning of each year
- Invest full contribution at the end of each year
- Invest contribution monthly throughout the year (monthly dollar cost averaging)
The results are clear. The investor who made their contributions at the beginning of the year, and invested completely in the S&P 500, ended up with $656,000 more than the end of year strategy and $340,000 more than the monthly contribution strategy.
Doing the same analysis and looking back over the past 10 years the results are similar: investing fully at the beginning of the year produced the best outcome for the investor.
The old adage holds true: it’s not timing the market, it is time in the market. By making contributions at the beginning of each year, investors give themselves more time to compound their capital in the stock market. In fact, there was never a point in time along the 30 year investment period when the monthly contribution or end of year approaches produced better results. While the next 30 years won’t exactly repeat the last 30, the principle of investing often and early is likely to hold. Make your contributions to retirement accounts as soon as possible and get invested!
Contact us today to learn more about how we can help you reach your long term wealth goals.
Henry A. Miketa
Athos Capital Advisors
Methodology: Using the data on the historical monthly returns of the S&P 500 over the past 10 and 30 years, as well as historical 401(k) contribution limits, we calculated the returns that maximizing the contribution limit every year would generate.
We timed these annual contributions in three ways: fully contributed at the beginning of the year, spread evenly across 12 months each year, and fully contributed at the end of the year. Initial and additional investments were made on January 1 of each year, the end of every month, or December 31 of each year (depending on the contribution strategy), generating monthly returns and summed up to determine total values.