-1

I just switched jobs. My new job does not have a 401K so I have rolled over my 401K to a traditional IRA.

Here's the question: I haven't invested it yet. It just barely got there so it is all cash. I want the money in the market, but I also know that dollar cost averaging could mitigate some of the risks... especially since things could get hairy pretty quickly.

Should I dollar cost average and gradually get back into the market?

Improve this question
0

1 Answer 1

Reset to default
1

I assume by that you mean gradually buying the same mix of funds over time. If that's the case, there is no rational reason to do this.

Dollar-cost averaging is an artifact of the way most people fund their 401(k). I would not consider it a viable "strategy". (Neither does Wikipedia)

Let's say you have $100,000 that you add $10,000 at a time. When you add money, one of three things can happen:

  1. Your funds are down from the prior purchase, so you're buying more shares for the same amount of money
  2. Your funds are up, meaning you are buying fewer shares, but your existing shares are worth more.
  3. Your funds are at the same price, so you're buying the same number of shares.

Since you can't predict the future, there's no mathematical justification for buying in segments. There's just as much chance that your funds will be worth more or less, so on average it should make little to no difference.

In fact, given the time value of money there is a slight advantage to investing it all now so you can capture any future returns. You can always rebalance later to capture gains on some funds and purchase funds that are down to (hopefully) catch them on a rebound.

Improve this answer

Not the answer you're looking for? Browse other questions tagged .