Financial Planning Fridays #137: Increase Your Investment Returns

Hi friends, I want to share a straightforward yet powerful strategy that can help improve your investment returns over time: dollar cost averaging. Dollar cost averaging means investing a fixed amount of money on a regular schedule, regardless of market conditions. A common example is your 401(k) plan, where a percentage of your paycheck is automatically invested every two weeks.

Let's say you invest $1,000 on the 15th of each month into the S&P 500. When stock prices rise, your $1,000 buys fewer shares, and when stock prices fall, your $1,000 buys more shares. Over time, this approach smooths out market fluctuations and can lead to higher overall returns. Here are the historical annualized returns of the S&P 500 over the past 5 to 25 years. Pretty good.

Now, these are the returns if you invested the same dollar amount on the first of each month instead. By investing consistently each month, your returns could have increased by 0.4% per year over 15 years and by more than 3% per year over 25 years. Now, to be clear, historically investing a lump sum upfront yields the highest returns because markets tend to rise over time. However, if you're investing new money regularly, such as paycheck contributions, dollar cost averaging helps you stay disciplined and smooth out market volatility.

If you're retired and no longer adding to your investments, you can still benefit from a similar approach by using a disciplined rebalancing strategy during market volatility. Dollar cost averaging is a simple but effective strategy that can lead to better investment returns over time. Thank you, and I look forward to talking with you next Friday morning.