Investing your retirement account is not easy. It’s natural to feel fear when the stock market drops and takes your account balances down with it. But the stock market is cyclical, and market drops are a natural part of the process. Unfortunately, fear and greed often drive us to overtrade our investments, then regret the moves we made later. Fortunately, there’s a simple system that can help you invest smarter in your 401(k), or anywhere. It’s called Dollar-Cost Averaging.
To do better, we need to control our emotions
“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”
-Warren Buffett
There’s a strategy for that
With dollar-cost averaging, you pick an investment, like an index fund that you’d like to own more of. You decide on a dollar amount you want to invest every month (or other time frame), which will likely be your automatic contribution amount. Pick a date (like the 1st of the month). Then, you’ll invest that whole dollar amount on that date every time. The key? You cannot vary your plan…no changing the amount, date or investment.
Here’s what happens:
· When your investment is less expensive, you’ll automatically buy more.
· When your investment is at a higher price, you’ll automatically buy less.
The system creates discipline for you
Do you see what’s happening? The system is forcing you to buy at lower prices, which is one of the fundamental goals of investing. When you fear the index will continue dropping, the system decides for you. And conversely, when prices rise, you might be tempted to buy even more…but the system forces you to buy less.
It’s not perfect, but it’s a great way to get your emotions out of the way and take advantage of lower prices.
