Dollar Cost Averaging

The best strategy to “ride the wave” during these uncertain times, at least as it pertains to the average worker investing for the future, is to dollar cost average. Dollar cost averaging is simply investing a fixed dollar amount on a regular basis, regardless of share price. The opposite of dollar cost averaging is market timing which is holding those investment dollars to try and catch a low point in the market.  While dollar cost averaging can be scary in a bearish market when it seems, there is no bottom to the drop in share prices, it still remains the most effective way to invest over the long haul.

The secret to becoming a super saver by using dollar cost averaging is less about knowledge of the market (I am living proof of that) and more about life choices. The first question one may ask is how much should I invest monthly to make this strategy work? The answer to this question changes frequently over time! Bottom line, to invest and grow wealth one needs to invest as much as possible while still being able to cover basic needs such as housing, transportation, utilities and nutrition.

How did this play out for us? For over 20 years, my wife and I chose to live frugally in our day to day lives. Simply put, we fulfilled our needs but mostly deprived ourselves of fleeting wants in order to achieve financial freedom in the future. Although living frugally, we found ourselves “comfortable” with our lifestyle and essentially put any additional resources automatically into investments every month. The actual dollar figure varied significantly over the course of 20 years, but the strategy did not. Once our needs were met, everything else went into investments. 

What type of investments did we make? Early on we invested a set amount monthly into taxable investment accounts which served as our savings account. This was our emergency fund as well as what eventually became the seed money for our real estate investments. On the subject of real estate investments, for the first 10 years, while we built our portfolio, we never took a draw from the net profits but rather reinvested into additional properties or investment accounts. Yet another form of dollar cost averaging.

From the time of our children’s birth, we’ve automatically invested monthly into a 529 account for both of them. We continue monthly investments still today even though our oldest is a freshman in college. Although I had to take the first draw last year during a bear market, the proceeds were nearly 50% earnings, accumulated tax free over 18 years. The 529s weathered the storms of the “Great Recession” from 2007 – 2009 and honestly, I don’t think we could afford college now without our 529 savings.

Although the military pension plan was one of the many reasons why I chose to serve a career, I also took advantage of the military’s version of the 401k known as the TSP. When TSP for military came about in the early aughts we increased our monthly payroll deductions until we were able to max out annual contributions.  Prior to the TSP days, my wife and I established personal IRA accounts that we contributed to monthly. While we ceased contributing to those accounts several years ago, they are still around and growing. We are considering resuming contributions to the personal IRA accounts as we are on “short final” to early retirement!

After taking the uniform off, we continued monthly retirement investing in my civilian employer’s 401k. This year, since I’m turning 50, we are increasing our monthly deductions to include catchup contributions. While it makes our net pay a little less every month, in this bear market, we are scoring bargains aplenty! Once the market pulls out of this economic funk, our nest egg will grow significantly and should be ripe for the picking when we need it most, in about 10-15 years.

The amounts and the accounts have changed over the years, but the basic premise has not. Saving a set amount every month is a way of life for us and complements our frugal living. While dollar cost averaging may be the technical name for this investment strategy, it’s really about life choices. Very thankful we made some good choices about personal finances early on that should enable us to achieve financial freedom in the not-too-distant future.

Finally, is it a little scary to see the impact the current economic slowdown is having on our investment account balances? Could it just all go south? Heck yeah! I try not to look at it too often. Faith in the American economy, I believe, is another key attribute of the dollar cost averaging strategy. The proven cyclic nature and historical performance of the economy should ensure dollars invested in a bear market today, grow tenfold tomorrow.  

Interested in rental property investing? Look for “Collect Rent, Don’t Pay It: A Beginner’s Guide to Rental Property Investing” on Amazon to learn how our family turned rental property investing into a successful side hustle!

Looking for a good how-to on wealth building? Check out my book, Millionaire on a Worker’s Budget: Five Financial Truth’s to Build Wealth on sale now at Amazon!

The commentary provided in this blog is for informational purposes only and is not intended to be a source of financial or investing advice.

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