Is DCA Right For You?

Dollar cost averaging is sometimes boasted as the best way to invest your money – over time in order to avoid investing a lump sum at a time of over-inflated prices. If you contribute to a 401k plan every pay check you are involved in this investment strategy, however the benefits of such a strategy are largely focused on investor’s emotions rather than being the statistically right choice.

If you want to eliminate the seasonal trends of the stock market, then a DCA over a period of one year might be right for you – for example investing $100,000 into the stock market by adding $8,333.33 to your portfolio each month. Some folks take a different stance and invest around November and sell their investments in April – based on a historical trend of stocks rising in these months more than the others. This is called the “Best 6 Months” strategy.

However, the best 6 months strategy when applied to taxable investments will always result in short term capital gains which are taxed more heavily than long term capital gains (See Stocks for more information). Also keep in mind that you are losing out on dividends when you don’t hold shares. If you are planning a six month strategy I suggest doing so in a tax-free account such as a Roth IRA using a mutual fund to capture a large portion of the market.

Most folks engage in DCA through regular 401k contributions, many companies match a portion of this contribution. It would be foolish to not contribute up to the employer match.

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