Financial Planning Fridays #80: The Benefits of Dollar Cost Averaging
Please let us show you how you can make profitable investments while the market is flat or even declining in value!
By making regular investments over time, you can actually take advantage of a volatile or declining market and turn it to your favor. Let’s look at 2 examples:
First, the S&P 500 had a 0% return from October 2007 until March 2012. The chart looked like this:
A really challenging 4 years around the global financial crisis. However, if you made a $1,000 investment into that same S&P 500 index on the 1st of every month during those 4.5 years of no return, your investments had an annual return of 11.56%. A $53,000 investment turned into almost $68,000. By continuing to add shares at the lower prices seen in 2008 and 2009, you wound up with a much better return as the market eventually reached even again.
Let’s look at an even more recent example- this time of a declining market instead.
The S&P 500 was down 9% from January 1, 2022 until June 1, 2023 and looked like this:
Once again, investors who consistently made the same investment on the 1st of every month during this market downturn came out ahead. This time they had a 12.2% annualized return and turned $17,000 into $18,380.
Consistently adding to your investments during flat or down markets can allow you to take advantage of the market volatility and earn a much higher rate of return during challenging times in the market.
This is why it is so important to commit to saving into your retirement and investment accounts on a regular basis. Start with what is comfortable and then try to increase it over time. Most importantly, stick with it, especially when the market is volatile or declining. This only means that you are going to get better prices and consequently better results in the long-term.
Thank you and we look forward to talking with you again soon.
Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.