What is dollar cost averaging, and how can it help build my retirement savings?

Dollar cost averaging (DCA) is an investment strategy where an investor divides up the total amount to be invested across periodic purchases of a target asset (such as stocks, bonds, or mutual funds) over time. In the case of employer sponsored retirement plans (e.g. 401(k), 403(b)) the target investment is typically mutual funds. This approach seeks to reduce the impact of volatility on the average purchase price of the asset over time. Here's how it works:
 

With DCA, you invest a fixed dollar amount at regular intervals (for example, monthly or quarterly), regardless of the asset's price at that time. For people saving in their 401(k) plan, that interval is defined by the number of pay periods per year. Additionally, a 401(k)-plan participant can often choose between a fixed dollar amount or a percent of their pay.
 

Because the fixed investment amount buys more shares of the target investment when prices are low and fewer shares when prices are high, DCA can result in a lower average cost per share over time. This can help reduce the risk of investing a large amount of money at a market peak and also reduces the investor’s temptation to try and time the market.
 

DCA is often facilitated through automatic investment plans offered by brokerage firms or retirement accounts like 401(k)s. This provides a way for investors to set up recurring contributions (or deferrals) without having to manually make investment decisions each time.
 

By contributing a fixed amount to your 401(k) regularly, you ensure that you're consistently saving for retirement, regardless of market conditions. DCA can help smooth out the effects of market volatility on your retirement savings. Instead of trying to time the market and potentially investing a large sum right before a market downturn, DCA spreads out your investments over time, reducing the impact of market fluctuations on your portfolio.
 

DCA encourages a disciplined approach to investing by automating contributions to your 401(k) account. This can help you stay focused on your long-term retirement goals and avoid making emotional investment decisions based on short-term market movements.
 

Overall, dollar cost averaging can be a valuable strategy for building wealth over time, particularly in retirement accounts like 401(k)s where the goal is long-term growth. However, it's essential to remember that DCA does not guarantee a profit or protect against loss in declining markets, and you should consider your own financial situation and risk tolerance when implementing any investment strategy.