Dollar-Cost Averaging: It's Automatic

As 401(k) evolves we are adding more and more automatic features. However, we should not overlook an automatic feature that has been there from the start—dollar-cost averaging. Dollar cost averaging is preached but rarely followed because life’s financial swings make it hard to set aside money to invest paycheck after paycheck, year after year. But 401(k) participants invest every month because of payroll deduction and the tax and matching incentives. In fact, the disciplined long-term utilization of dollar cost averaging makes 401(k) investing different from other investment approaches. The error of those concerned about the 401(k) system in light of the recent and current stock market volatility is that their conclusions assume the typical short-term investment framework: i.e lump sum investing, current balance preoccupation, peak to valley comparisons, short term trading, sector rotation etc.

While the stock market ebbs and flows, 401(k) participant investing remains constant and balanced. This means they never have to worry about incorrectly timing the market by purchasing at too high a price nor are they tempted to sell at the bottom. In fact they avoid the stress of ever having to make a market timing call. It’s simple. It’s boring. It works. It’s automatic.