Dollar-Cost Averaging – A Blessing and a Curse

By Thomas R. Kestler

You want to begin a long-term investment program for college or retirement. That’s great, but you’re nervous about all the market volatility you hear about in the news. Are we headed for a crash? Are the prices too high? The inertia sets in, and you sit on the sidelines missing out on long-term opportunities.

If you invest a lump-sum in the market, it can do two things. It can go up, or it can go down. On the other hand, you can make that volatility work in your favor by systematically investing through the ups and downs. You’re probably already doing this in your 401k. The process is called dollar-cost averaging.

By investing a fixed amount every month, no matter where the market is, you end up paying the lowest average cost over time. Let’s take a simple example. You begin investing $100/month in the ABC Growth Fund, and the share price moves up and down over the next six months. Here’s what it looks like:

As the share price fluctuated over time, your $100 bought a different number of shares monthly. You automatically bought less of the “expensive” shares (Years 2 and 3), and more of the “bargain” shares (Years 4 and 5). You invested a total of $600 and the price per share in month 6 is the same $10 as when you started, but your account is now worth $649.70 ($10 x 64.97). Over that six-month period, your average price per share was $9.28 ($600/64.97).

Dollar-cost averaging over time allows you to pay a low average cost per share. And, more importantly, systematic savings over time is the most efficient way to accumulate wealth.

Now, as Paul Harvey would say, “The rest of the story…”

Dollar-cost averaging in reverse could be a nightmare. Let’s say you took advantage of dollar-cost averaging to accumulate a significant nest-egg. As you move into your “retirement red-zone” (five years before and five years after retirement), you begin to envision how to use your nest-egg to supplement your retirement. How do you make a known amount of money last for an unknown period of time?

Far too often, people begin a systematic withdrawal plan from their nest-egg. However, the system that worked so well during accumulation works against you in distribution. As the share price fluctuates over time, you begin withdrawing more shares when the price is low and fewer shares when the price is high – exactly the opposite of what you should be doing at this point of life and a significant market adjustment in the red zone could be devastating.

Distribution strategies will require some significant planning, and the advice of a qualified professional here could be invaluable. Taxes, estate plans, longevity, and risk tolerance all need to be considered.

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Tom Kestler has been involved in the financial planning field for over 45 years. He is a graduate of Millersville State University and the College for Financial Planning in Denver, Colorado (for which he has acted as an adjunct instructor) and carries the Certified Financial Planner (CFP) designation.

He has also been awarded the Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC) and Chartered Mutual Fund Counselor (CMFC) designations from the American College in Bryn Mawr, PA. He was the founder of Kestler Financial Group, Inc., a firm which specialized in the marketing of financial products and services to over 5,000 independent representatives throughout the United States. Kestler Financial Group was acquired by Highland Capital in 2018.

Mr. Kestler carries Life, Health and Variable Products licenses in several states and provides consulting services to insurance companies on product design and development. He also acts as an expert witness in securities and insurance litigation cases.

Prior to his retirement, Tom served as VP Advanced Sales at Highland Capital, and also CEO of Branch Development Partners, an Office of Supervisory Jurisdiction (OSJ) for Securities America, Inc. (now Osaic), an independent securities broker/dealer.

Tom is teaching our Financial Wellness Course— the next class is scheduled for Monday, January 26th. Sign up today!

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