Could things take another downward spiral? Yes!
Today, if you are still invested, you are experiencing a continued roller-coaster ride in the equity markets with cyclical trends poised to further damage retirement portfolios a little more before we see an upswing, possibly in Spring 2023. This makes it important to discuss the effects of reverse dollar cost averaging or RDCA.
Most investors are familiar with dollar cost averaging , which is an accumulation process to invest in a specific manner and a defined framework. With DCA you invest a set dollar amount on a continued periodic basis, for example, at the beginning of every month. Of course, market cycles effect the performance of this accumulation process, however after the last 50 years of studies on this investment style, economists now unanimously agree this method always impacts portfolios positively over longtime horizons.Article content
You see, by investing consistently, one can take advantage of market swings when share prices are lower and in turn, purchase fewer shares when the prices are higher. Over the long term, the cost of the shares purchased always works out to less than the average share price. Here is an example of how dollar cost averaging works. You invest the same amount every week, month, or year regardless of the market conditions. In our example we want to invest $5,000 every year into an index fund. At the end of the five years, we have invested $25,000, however due to dollar cost averaging, we own more units, and the portfolio has grown over time to a value of $28,950 .
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