In this era of instant gratification, investors have become increasingly gambler-like in the pursuit of immediate rewards; this is why many people recently gambled on “meme” stocks like GameStop and AMC Entertainment. Those who got lucky experienced a dramatic gain, while others have experienced a significant decline in these stocks as the hype has begun to fade.
Investing Money Today to Use as Retirement Income Tomorrow
Unfortunately for many of these modern investors, there simply isn’t an immediate reward for saving for retirement. While a new TV or car can be enjoyed immediately, it can take decades for you to realize any semblance of a reward for your diligent 401(k) or 403(b) contributions. Retirement financial planning takes a lot of patience but is all worth it in the end.
“ Maybe you don’t view retirement as a purchase in the same lens that you would view a new TV or car. Yet that is exactly what you do when you participate in a 401(k) or 403(b) plan; you are investing money today to use as retirement income tomorrow. Thanks to dollar-cost averaging, you can strive to retire on your own terms by simply investing a little bit all the time. ”
The Dollar-Cost Averaging Strategy
Dollar-cost averaging involves investing a constant dollar amount consistently for an extended period. You may not realize it, but your 401(k) or 403(b) already employs the dollar-cost averaging strategy every pay period. Since the prices of the investments in your 401(k) or 403(b) fluctuate daily, your contributions buy a different number of shares each pay period based on the current price. When shares are most expensive, you will buy fewer shares. In contrast, when the shares have decreased in price, you will buy more of them.
Dollar-cost averaging allows people to avoid the two most dangerous emotions of investing: fear and greed. When the stock market is down, investors become fearful and sell their investments while they are cheap. On the flip side, when the stock market is soaring, investors become greedy and rush in to purchase investments at or near their peak price. When you dollar-cost average, you avoid investing too much during market peaks and too little in market downturns.
We have included a table that helps to illustrate dollar-cost averaging in action. Note that in this example, even though the stock’s price was lower in December than it was in January, the account still had a positive return for the year due to dollar-cost averaging.
While investors can treat the market like Vegas and gamble away, investing a specific amount of money on a consistent basis into the stocks of quality companies or quality investment options in your 401(k) or 403(b) tends to be a more reliable strategy in the long run. The savings process can take decades, and a small deferral amount today may seem trivial, but dollar-cost averaging mixed with compound interest can help turn decades of small but consistent contributions into a significant nest egg at retirement.
Expert 401(k) and 403(b) Advisors
Today, the burden of preparing for retirement has been placed on the individual, making saving for it more important than ever. But between balancing all other aspects of their lives, the average American doesn’t have time to add managing their retirement account to their to-do list. At 401karat, our expert 401(k) and 403(b) advisors do the heavy lifting for you, providing quarterly allocation recommendations based on your employer’s 401(k) options. If you’re interested in learning more, schedule a consultation with 401karat today.