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My 401k Is Still Under Water So I’m Using Dollar Cost Averaging To Bring It Back Up

I confess, my 401k portfolio was invested too aggressively in 2008.  I’m still down big as the chart shows below: (Ouch, yes it hurt me just to look at it)

401KBalance2008_and_2009

Yes, the cumulative rate-of-return from the beginning of 2008 to the end of 2009 is -18.6%.  Looks pretty bleak for me huh…  So what did I do in 2008-2009 to rectify the problem?  I increased my contribution rate to the maximum percentage that I’m allowed to.  So as the market was going down, I was hoping to take advantage of a concept call dollar-cost averaging.

What is Dollar-cost averaging?  Well if you allocate a constant amount of money for buying a security (stocks, bonds, mutual funds, ETFs… etc) in a measured time period (for example, quarterly), it enables you to buy more shares in a bear market (or less in a bull market) of that security.  So when the market is declining, you buy more shares of a security, and that’s what I’ve been banking on.  Now that we’ve had a decent run-up in the valuation of the stock market, I would be more hesitant now…

Let’s me give example.  Say, I buy $100 dollars worth of a stock (let say BAC) every once a quarter (random purchase date)…

So that means that during the following time periods I bought the following shares:

Amount
Price of theAmout ofCumulativeValue of
InvestedDateBAC StockSharesSharesShares
10012/03/0834.482.92.999.99
10001/23/096.2416.0318.93118.1
10005/01/098.711.4930.42264.65
10010/30/0914.586.8637.28543.52
40001/02/1015.0637.2837.28561.42

This would be about a 40% return on my investment (If I did this, which I didn’t of course…, but it’s a good example).

So, yes I’m not happy that I’m still down, but taking everything as a whole, I’m doing okay, even if I am still down from my portfolio high at the end of 2007!

5 Responses to My 401k Is Still Under Water So I’m Using Dollar Cost Averaging To Bring It Back Up

  1. I am new to the concept of dollar cost averaging and your explanation was easy to understand. Right now, I don’t invest enough for this to make sense and I like the idea of doing serious tweaks to my investments once or twice a year.

    Nice graph! Hope this year will be a better year for your portfolio.

  2. Dollar Cost Averaging is great, of course it works both way, but in a down market, it’s a little beam of sunlight in the dark thunderclouds…

    I’m keeping my fingers cross in 2010!!!