Since you’re an independent contractor and have to manage your retirement on your own, you might consider taking an investment approach that goes by the name Dollar Cost Averaging. This term simply means you go into the investment market at the same time each month and buy a small increment of an asset at whatever the price is at that time, with the goal of evening out your average monthly investment cost over time.
From a risk-reduction standpoint, it’s worth considering, because even though your main risk comes from the asset you choose to invest in, you can minimize some risk by evening out the monthly price at which you buy.
An example is buying into a mutual fund at $50 on the first Monday of every month. One month you might pay $16 a share, the next month you might pay $20 a share, and the next month you might pay $24 a share. That averages out to $20 a share over three months. Now contrast that with an investment approach in which you buy into an asset only when you have some extra money. Let’s say you have a good month and you want to put $1,000 into a mutual fund. At the time you make your purchase, the stock price is $30, so your investment is $10 a share pricier than the average you’re paying taking the incremental approach.
To be sure, the stock price could be at a low at the time you invest, maybe $15 a share. That makes it a great time to buy, but that’s the result of fortuitous timing, not strategy. If you wait until you have a lump-sum to invest, you leave it to chance the stock price will be favorable.
In any case, dollar cost averaging is a simple concept but it can take a lot of the guesswork out of your retirement planning. Victoria Gillespie of REALTORS® Federal Credit Union, a division of Northwest Federal Credit Union, talks about this investment approach in REALTOR® Magazine’s latest Your Money Matters financial planning video.
Watch all the Your Money Matters videos:
Go to the third video on credit unions.
Go to the second video on reserve accounts.
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