I put Dollar cost averaging to the test with $500 on the line. Credit paladinsf.

I believe as a financial coach and financial writer I should eat my own pudding.

Following my article What is Dollar Cost Averaging: Drip Your Way to Millions, I decided to follow my own advice and devise a dollor cost averaging (DCA) experiment.

Remember the reason we dollar cost average is to spread out our investments since we don’t know what the market will do in the future.

*If you’re in the UK it’s called pound cost averaging. Fun fact eh?

The DCA Experiment Plan

I decided to invest $500 in a S&P 500 Index Fund for 5 consecutive weeks. I could have staggered it out for 5 months (1x per month), but I don’t like my money sitting on the sidelines for too long.

I invested $100 per week starting in February.

The Dollar Cost Averaging Experiment Results

The below is a summary of the 5 transactions.

• The average purchase share price was $139.36
• The market did very well during this time period (near market highs).
• If I had invested all $500 on 2.7.13 at a share price of $137.95, I would have been able to purchase 3.624 shares vs the 3.587 shares actually purchased–a difference of .037 shares.

Final Thoughts on my Dollar Cost Average Experiment

So in the end, my Dollar cost averaging experiment showed that a lump sum would have fared better in the end than DCA.

We don’t know the future and what the market will do from day to day.

My experiment could have easily gone in favor of Dollar cost averaging (Pound cost averaging), should the Sequester tanked the market, a bad jobs report, or Apple released another Apple Maps like debacle.

Does that prove that DCA is a bad idea? Will I abandon DCA in the future?

NO WAY! I will continue to engage in dollar cost averaging to smooth out my investments in the market. I’ll take a loss of .037 shares from time to time to hedge against the highs and lows of the stock market.

What are your thoughts about my Dollar cost averaging experiment? Do you have any conclusions I missed? 

Sometimes a different path is needed. Credit Mark Fischer

It is always a good idea to evaluate your investments every so often. I’m no fanatic and I invest for the long term, 5 or more years, but I do examine at few areas: earnings, fees, and the rate of return compared to the market.

Generally I only look at my quarterly statements, so I don’t freak out on days when I’m up or down thousands of dollars.

After a recent examination of my mutual fund portfolio I decided to make a change. I’m not alone; in fact million of Americans have switched mutual fund companies in the last few years. [This is not a recommendation to shift your investments, this is simply my story]

Why I Switched My Mutual Fund Company

1. I hate paying fees. I especially hate paying fees when a service looses money vs. their peers. I was paying yearly maintenance fees and also a hefty sales charge with each dollar invested (front load). As our portfolio grew the fees dropped, but it was still high.

2. Bad Performance vs. S&P 500- The markets have had a tough few years and I realize this. Yet, my old mutual fund family was lagging behind the S&P 500 and its peers. Apparently my managed funds as a whole haven’t had a good run, while index funds fared better.

3. My NonExistent Broker- For the last few years, my wife and have been fortunate to max out our Roth IRAs. Our broker earned commission on our ROTH IRA + Rollover 401K to IRA yet he was nonexistent.

Our broker didn’t call, email, send a newsletter, or follow up to see if we were going to max out again like the past few years. I’m sure he has bigger fish to fry, but a quick email or an ounce of client attention would have gone a long way.

My New Mutual Fund Company

1. I don’t pay yearly fees if I opt in for online statements. My sales fees are now some of the lowest in the industry. Over the lifetime of the investment, this will translate to thousands in cost cutting savings.

2. The majority of my mutual funds are now in index funds that will ensure I keep pace with the market. I won’t beat the market, but then I won’t dip below either. I’m OK with this.

3. Now there isn’t a broker getting fat of my regular investing. I only have myself to blame for improper allocation of funds.

That is why I use tools such as the Morning Star Instant X-Ray to break down my choices. I also plan on paying an fee based independent broker for a portfolio assessment when I hit a predetermined dollar amount.

Have you made any changes to your investments in recent years? Have you examined your mutual fund family to determine if it is still the best fit for you? 

The swimming pool is a great place to learn about life and love when you’re a kid. Come on admit it–you had a crush on the *lifeguard too.

Learning how to swim took practice, hours at the pool, and the guts to jump in and try. You might have been a natural swimmer or maybe you had to work at it.

Investing holds many similarities to swimming. Let’s dive in together…one…two…three…jump!

Learning how to swim is like learning how to invest.

1.Take Deep Breaths This is the first rule. Don’t breath the water–you don’t have gills. You’ll need a lot of oxygen in your lungs for swimming.  Investing is for the long haul (5 years or greater). Take deep breaths and prepare for long seasons of swimming.

2. The water is cold at first- If you just stick your toe in the water, that water is freezing. It’s not until you put your head underwater does the water finally feel normal. Investing seems odd, weird, even scary–until you finally commit and begin investing does it seem normal.

3. Kickboards and Practice- I remember using kickboards as I learned how to swim and even later to get my legs stronger. Investing takes practice and maybe even a few tools (dollar cost averaging) to help your investments become stronger.

4. Don’t forget the floaties (water wings)- As you begin to swim, water wings keep your head above water. Index funds are the water wings of investing and you’ll find that they work well even after you learn to swim. Sometimes simple is best.

5. Find an instructor you can trust- You might not want to learn how to swim from your crazy uncle Louie who hasn’t swam in 15 years. Don’t listen to you uncle’s investment advice either, unless he’s a millionaire. Find a teacher and advisor you can trust to learn about investing. (How to find an investment professional)

6. Get over your fear and jump in- Jumping in the water takes guts and faith in your swimming ability and the fact that you’ll float. You’ll need to get over your fear of investing and begin or rejoin the pool party.

There aren’t many other ways besides maybe real estate to prepare for retirement and your children’s college beyond being involved in the stock market. Take the plunge!

7. Wear Sunscreen- You’ve got to protect your skin from harmful UV rays. Protect your investments by diversifying your portfolio and preparing for inflation.

8. Invite Your Friends- Swimming is best done with friends. It’s hard to have a water fight with yourself! Ask your friends about investing, start an investing club, and include others in your investment decisions.

9. Bring Money for the Snack Bar- Swimming makes for a hungry tummy. Don’t forget to bring money to the pool for snacks, but only money that you can afford to loose. I think I always spent any money I took to the pool. Whatever money you invest, be prepared to loose it all.–it’s not likely this will happen, but don’t invest money you’ll need for your rent next month.

10. The cool kids jump off the high dive- Diving off the high dive takes practice and a lot of guts. There is a lot of prestige and also a chance you’ll hurt yourself. Investing in complex instruments and advanced trading practices also have a high risk/reward factor. Many times they are just not worth the risk.

Photo credit TenZeroNine

11. Swimming is Fun- Don’t forget the purpose of swimming is fun! If you’re not having fun investing and having trouble sleeping at night, then you’re doing it wrong. Investing should be fun or at least tolerable. Get help if your investment plan is causing you angst or sleepless nights.

12. Everyone Swims Differently- I swam a lot as a kid and was even on the swim team for a few years (backstroke was my style), but investing wasn’t as natural for me. I had to learn and continue to learn how to invest wisely and find which investing style (stroke) is best for me. Find what investments work best for you and stick to regular investing.

*For the record I married a hot lifeguard.

Are you ready to join the pool party and begin investing? What keeps you from investing or helps to keep you in the investing market? 

Photo Credit lizbadley (Creative Commons)

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