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Posted: 6:00 a.m. Wednesday, Jan. 16, 2013

Dollar cost averaging makes you a fortune over time



By Clark Howard


What is the best, safest, and most secure move to make with your retirement dough? There's new math out to deal with your anxiety about the direction of the nation's stock market and the economy.

Forbes back-tested the stock market using algebra going back month by month to the depths of the Great Depression. Their math shows a rise on average of 6.3% in stock market valuation over the three-quarters of a century from June 1937 through September 2012.

That's all well and good, but many of us weren't even alive in 1937. So in an attempt to make their data more current, they looked at a hypothetical investor who popped $10,000 in an index fund faithfully every year through 2012.

That hypothetical investor would have contributed $400,000 over a 40-year period. But the value of their shares would be $1.7 million!

That's the power of dollar cost averaging, which is just a fancy name to describe the practice of putting in little dribs and drabs of money in equal amounts into a retirement account every pay period or once a month.

Need another example? This one comes courtesy of BusinessWeek:

"Morningstar ran a sample $10,000 invested on Dec. 31, 2007...By the end of 2011, the original $10,000 was worth close to $12,000."

If you have money you need right now, don't invest it. Put it in a savings account, CD, or money market fund. But if you have money you need down the road, investing it is the way to go.

Yet another race that the tortoise wins, not the hare!