Slow and Steady Win the Race…is the idea behind Dollar Cost Averaging

Remember your childhood story of the race between the tortoise and the hare?

Slow Steady Wins the Race

The hare thought he is a lot fast than the tortoise decided to take a nap and runs very fast to catchup, but did realize he over-slept. Even though tortoise was slow, he just grinds on slowly and steadily and beat the hare.

What we learn from the story is rather than trying to be aggressive to time the market, you contribute consistently small amount every month to a low-fee index fund.

Low-cost Index Fund Trading

As you see in the example of Andy and Brenda. Andy sporadically invest lump sums of money while Brenda invest smaller amount every month consistently.

Dollar cost average vs Lump Sum Investing

Andy ended up buying shares only once at a higher price, while Brenda was able to buy more shares at various prices, which averages out to be cheaper per share price.

Now, when the price per share goes up, who has the better return?

So do you want to be Andy or Brenda?

Real life example. I contribute every month to my employer-sponsored retirement account  because my employer matches a certain percent.

My contribution is taken out of my paycheck every month whether the market is up or down. So during the 2008 crash, I was still contributing every month. So I was buying shares at dirt cheap prices. The year after the crash, I noticed an extra $60,000 in my account value.

Where else can you make $60,000 in a year without moving a finger?

This is the magic of Dollar Cost Averaging