Dollar Cost Averaging Works

[jpro]

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OK first off, I'm not a financial genius or even have much experience at all investing. My financial education consists of reading the following books: The intelligent investor, Rich dad Poor dad, most of the Peter Lynch books, and some others that I cannot recall.

Last year when I started internship they offered a 403b with 50% match up to 4% of base pay. Naturally I jumped on the chance because it's like free money. As the year went on the bottom fell out and everyone was loosing money including myself. Well when everyone started to panic I increased my monthly contribution. Not by much. Even after that I continued to loose money. A few months ago right before the markets hit the floor I decreased my contributions significantly for personal reasons. I really didn't want to.

Today I check my portfolio and I am up 13.7%. If you include the 50% match and the total value of the portfolio compared to my contributions it is 57.7%. This is with the worst economy since the great depression.

These returns likely would not have been as great if I had significant balance beforehand, but it really proves that dollar cost averaging works even in the worst economies. In fact probably better.

In case you were interested I have a somewhat aggressive allocation:
30% - Oppenheimer Developing Markets Fund
20% - Janus Contrarian Portfolio
20% - Russell Small Cap Index Portfolio
20% - Fidelity Contrafund Portfolio
10% - Templeton Global Bond Fund

 

[UserNameNeeded]

These returns likely would not have been as great if I had significant balance beforehand, but it really proves that dollar cost averaging works even in the worst economies. In fact probably better.

That's the rub. If you already had a huge balance and lost 50% in one year, the only way to make up for that (assuming there's a modest rebound and not a quick 100% upturn to make up for the loss) is to sink a "huge" chunk of new money to lower your cost basis and get out of the red.

Most investors aren't like you or me (I've also recovered all my 2008 losses by making new investments) -- and we won't be in this situation 10 or 20 years from now when the size of our portfolios exceed our annual incomes. If you end up saving, say, $1 million and a 2008-like downturn happens again, you'll be down to $500,000. If your annual income is only $150,000-- there's no way you'll be able to quickly ramp up your savings/investment allocation to average down your cost basis and return to profitability.

 

[dragonfly99]

Username is right.
Even if you had only a few years' contributions in there, you'd be grinding your teeth right now. I'm only a fellow, and I lost a good 40% or so of the value of my 403b plan in the past year.

However, for any of your getting 100% match or 50% match or something from your employer, that's basically a 100% or 50% return right away, so unless the stock market continues to tumble, it's kind of hard to lose money with an employer match going on. You can certainly lose money on any $$ over and above the employer match that you put in...that's certainly what happened to me in the past couple of years, given the way the stock market has tanked.

 

[Llenroc]

I leave it all to my secret bank accounts and stock holdings.