I’m too cool to dollar cost average…

If you’re new to the personal finance game, you might not even know what ‘dollar cost averaging’ (DCA) means, so let me explain it real quick. All it basically means is strategically investing a predetermined amount of money on a specified time interval. Many people utilize the DCA method for their Roth IRAs.

Here’s a typical example…

Helga can contribute up to $5,000 this year in to her Roth. She could make a one time $5,00o contribution and put the Roth on the backburner ’til the next calendar year. There is a pretty big risk with this though. if she invests that $5,000 right before the market drops 1,000 points, she’d be up a creek without a paddle. Instead of a one time $5,000 payment, she could take that money and divide it by 12 months. This would leave her with a $417 monthly payment. If invests this $417 from January through December, she will still max out her Roth contributions, but will also mitigate any sudden drops in the market. Since she is buying on a specific day, and not a specific stock price, she is going to be more consistent and less emotional when it comes to investing. It’s generally a pretty good strategy.

I, however, am a PF rebel and do things a little differently. Instead of break my Roth IRA contributions over 12 months, I break them up over three payments. I typically make a $2,000 contribution, and two $1,500 contributions at sporadic times throughout the year. There is really no telling when I am going to invest. I rely on two basic principles. 1) Have enough liquidity so I can afford to contribute and 2) Invest just before I think the market is going to go up. Yes, the second option is just random guessing, but it makes investing a little fun.

I would totally be to down dollar cost average and make even payments each month, but I am faced with one tiny problem. IT WOULD BE WAY TO EXPENSIVE FOR ME. When I first opened up my Roth, I didn’t know what the heck I was doing. I decided to open it with Wells Fargo. This ended up being a mistake. Not because Wells Fargo sucks (they’ve actually been quite pleasant), but because I didn’t pay attention to the fact that Wells charges a $35 fee for each trade I make. This would cost me $420 in fees ($35 x 12 = $420). That’s a whole extra payment!

This is why I make as few trades as possible… one for each fund I own. I am still getting charged $105 for those three trades, but I’ll grin and bear it for a short while longer. All Wells Fargo customers with account balances over $25,000 are deemed premier account holders. This comes with a few perks, the most important being 100 free trades a year. My Roth currently sits at $14,000. So after two more years of contributions and a small improvement in the market, I should hit the premier status and avoid those pesky trading fees. Once I’ve reached baller status, I’ll mix my investing game up and join the 12 month dollar cost averagers.

For those of you that dabble in the stock market, do you mess around with dollar cost averaging? What’s your strategy? Set payment each month? Random payments when you think things are on sale? Did you even know what dollar cost averaging was before this post? Did you hate that I actually wrote about something finance related?

18 thoughts on “I’m too cool to dollar cost average…

  1. I too dabble in ‘market timing’ somewhat. If I have a little extra money and I think the market is oversold, I will buy that. (That is for our own savings, retirement and college are invested every month.)

    35 dollars a trade seems incredibly extreme to me. Especially when you are dealing with Roth IRAs that have a 5k max. Even if you deposited the whole 5k at once, that is still a hefty charge.

  2. I don’t like the fees either. My Roth is directly with Vanguard, and I don’t pay any fees for investing there beyond the expense ratios of the funds used. You are paying about 1 1/3% of your account in annual fees, which tends to mitigate the benefits of investing in index funds.

    If you’re going to continue with Wells Fargo, the way you’re doing it is probably the best approach. But there’s no law against opening multiple Roth IRAs, and you could open one today with Vanguard direct, DCA from the start, and perhaps even shift the contribution portion of your existing Roth to the other account. Just leave the earnings in WF to grow untouched (and hopefully unfee’d), and chalk up the WF account to experience.

  3. wow ninja those fees seem ridiclous but i assume they offer you a great service since you have stuck with them. i break my contributions into quarters so I make 4 payments throughout the year.

    in regards to timing, since i consider this a 40 year investment basically, im not too worried about where the market is at the moment and just invest every 3 months regardless of where the market is.
    Preferred Financial Services Blog

  4. I’m with Everyday and Larry on this – your Wells Fargo fee is WAY too high! Larry has a great suggestion in moving your funds to a more reasonabe fee structure, so really take a look at doing that.

    My DH has a complicated mathematical model for investing our taxable and tax-deferred accounts, so I suppose that counts as dollar cost averaging. We have big enough accounts to invest in stocks directly, and we use eTrade and Scott Trade for the cheap commissions. We trade the different accounts once a month on a staggered schedule (i.e. IRA’s on the last Thursday, taxable on first Wednesday, etc.). It’s a completely non-random, unemotional system, which has worked out very well for us.

    Also, I like that you wrote about something finance related, and I’m sure you can come up with some cool drawings for your finance posts. Maybe you could draw your stick figures using calculators and snipping up their dollars to show cost averaging?

    • Good suggestion, J. But fyi for anyone considering it, check the fine print:

      † … Offer not valid for IRA or Education Savings Accounts.

  5. Brief background: I was burned while taking a tip on investing in a foreign currency through PayPal account balance transfers in the summer of 2008. And I brought $150 of Washington Mutual stock after it crashed – eventually making a $16 return. Basically, I’m getting my feet wet to better understand what to do when I actually have an income. (I’m between university and work.)

    Now: I’m dropping $7/week into Google stock in a Roth IRA with ShareBuilder’s free automatic trades. So that must be DCA. It’s a company I expect to grow. Although, I understand that it’s unwise to just bank on one company.

    • “Although, I understand that it’s unwise to just bank on one company.”

      You’re absolutely right about that, and I’m uneasy about any of the investment approaches you’ve taken so far. They’re unnecessarily risky in themselves, and you’re not at all diversified. I would take Budgeting’s advice in the following message and invest in a Vanguard target fund (don’t know why she uses Fidelity’s, as Vanguard’s is IMHO more advantageous). If you don’t have the $3000 initial buy-in amount, you might look at the Vanguard STAR fund, where you’d need an initial $1000. Of course if you’re just starting out and not working yet, no real harm is done at this point.

  6. I pay nothing extra to contribute to my Fidelity Roth IRA…no extra fees as long as you contribute $2500 to start with or set up an auto-contribution of $200 a month (that’s what we did in 2007…now we have more than enough to contribute any way we want).

    My 401(k) is completely invested in the Vanguard 2035 target date mutual fund (expense ratio of 0.2%) and my Roth IRA is completely invested in the Fidelity 2040 target date mutual fund (expense ratio of 0.8%).

    I contribute $300 a month to the Roth IRA and dump the other $1400 in whevever I feel like it (this year I dumped $1000 in after the big February crash and am thinking of contributing the other $400 right now).

    Ninja, I think your loyalty is applause-worthy…those fees are crazy man.

  7. i don’t hate it at all i think you make some good points. for me it is hard to invest in a Roth IRa or any IRA for that matter.

    it just does not seem like a safe bet these days, to do the same thing as everyone else….that does not set you apart from the rest of the herd.

    my goal is to invest in the market and keep some money as cash so i can be ready to make moves when the time is right.

  8. I dollar cost average after I graphed my performance over 3 years and worked out I would have been better of if I had dollar cost averaged. That old addage that “Market timing works, just not for you” was definitely true in my case. I had a remarkable nack for buying badly, i still made money but it, I could have made more money with less stress by accepting my knowledge deficits and just dollar cost averaging into an index fund

  9. Have you ever considered rolling your Wells Fargo Roth IRA directly into a Vanguard Roth IRA. I did that to get away from my terrible IRA that my New York Life insurance agent sold me into an online broker’s Roth IRA. I’m thinking about rolling it over directly into Vanguard now because there the cost to buy Vanguard mutual funds from my online broker. Or is it even possible to rollover a Roth IRA into another Roth IRA?

    • Good question. You can certainly do a trustee-to-trustee transfer with a traditional IRA, which you’re funding with tax-deferred money. Whether you can do the same with a Roth, I don’t know. There is no question that you can take your Roth contributions and do as you like with them at any time, since they’re paid with after-tax dollars. But there may be taxes and penalties on the earnings, and there’s a 5-year holding period. I just don’t know if these restrictions affect a trustee-to-trustee transfer, however. I’ll ask my accountant.

  10. Well, I do a little of both. My 401K is a regular deposit into the stock market, so that’s dollar cost averaging. The main reason I don’t do it with other investments is that I didn’t have a regular amount that I could rely on to invest, so I am more opportunistic and wait til I have a windfall to use.

    Eventually, after the mortgage is paid off, my goal is to do all my investing automatically at the least possible cost. I use TD Ameritrade and they let you autodeposit into a mutual fund for free once you’ve bought it. So there’s a 1 time trade fee (plus whatever it costs to buy in, some mutual funds have an additional fee), then the other deposits are free. I just opened a non retirement account and got 100 free trades. They’re running a promotion right now.

  11. You should definitely look at rolling over your IRA to somewhere else (fidelity or vanguard). You have a lifetime of savings ahead of you – do you really want to pay $35 each time you save? Wells Fargo is fine for day to day banking, but there are better places to do your investing.

    But, given the fees, I agree dollar cost averaging isn’t for you.

    • His argument is that within two years, his account will be large enough that the fees will be waived.

  12. DCA is something I don’t keep in mind. I’m currently not vested into the stock market right now (I’m anticipating a huge market crash in US stocks and bonds) but I usually don’t DCA. Instead, I would use an option selling strategy. Out of the stock, I would sell cash secured put options. This would allow me to collect a premium.

    If the stock doesn’t go down, I keep that money free and clear. If it does go down on a stock I’m interested in, I’ll be glad to own it. So slight declines work in my favor (crashes are still scary) But owning the stock, I would turn around and sell covered call options, preferably set at a strike price set above what I paid the stock for. I can still collect dividends doing that!

    In short, DCA is something I only do with precious metals. It’s mostly designed to assuage capital losses. I find there’s much more room for opportunity to study market trends.

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