Dollar cost averaging (DCA) can be an effective way to invest your money over time, particularly during volatile market conditions. The idea is that you invest a set amount on a regular schedule, which helps smooth out the impact of market swings.
As we continue along in 2024, there are some appealing dollar cost averaging opportunities across various asset classes. Below I have compiled my top recommendations if you’re looking to dollar cost average this year.
1. Index Funds
Index funds should be the foundation of most investors’ portfolios, as they provide instant diversification and long-term growth potential. By dollar cost averaging into broad stock index funds, such as the S&P 500, you lower your average cost basis over time.
I particularly like the Vanguard S&P 500 ETF (VOO) for dollar cost averaging purposes. With an ultra-low expense ratio of just 0.03%, it tracks the S&P 500 index while minimizing fees.
Benefits
- Low-cost diversified exposure to 500 large U.S. stocks
- Closely tracks the S&P 500 benchmark
- Liquid and efficient way to build core holding
Drawbacks
- Must be comfortable with stock market volatility
- No exposure to international stocks or bonds
- S&P 500 already up substantially in recent years
As seen in the chart below, consistently investing in the S&P 500 over long periods has rewarded investors handsomely. Sticking to a dollar cost averaging plan helps eliminate emotions when times get rocky.
| Initial Investment | Annual Addition | Years Invested | Annual Return | Ending Value |
|---|---|---|---|---|
| $10,000 | $0 | 20 years | 8% | $46,610 |
| $0 | $3,000 | 20 years | 8% | $131,507 |
| $10,000 | $3,000 | 20 years | 8% | $178,116 |
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch
2. Dividend Aristocrat ETFs
One of my favorite dollar cost averaging approaches is loading up on shares of Dividend Aristocrat stocks – S&P 500 companies that have paid and increased their dividends for at least 25 consecutive years.
A cost-effective way to gain exposure is through ETFs such as ProShares’ NOBL or SPDR’s SDY, which track indexes comprised of Dividend Aristocrats.
Benefits
- Exposure to elite group of dividend growth stocks
- Track record of steadily rising payouts
- Potential for long-term capital appreciation
Drawbacks
- Concentrated in defensive sectors
- Lower overall dividend yield than broad market
- Subject to volatility during market declines
Dollar cost averaging helps mitigate volatility risk, while the growing income stream helps build wealth. A sample 20-year dollar cost averaging scenario is shown below based on NOBL’s historical performance.
| Initial Investment | Annual Addition | Years Invested | Annual Return | Ending Value |
|---|---|---|---|---|
| $10,000 | $0 | 20 years | 10% | $100,625 |
| $0 | $3,000 | 20 years | 10% | $194,697 |
| $10,000 | $3,000 | 20 years | 10% | $295,322 |
3. Robo-Advisors
For hands-off investors who want automated portfolio management, robo-advisors like Betterment and Wealthfront are great dollar cost averaging options.
Robos provide globally diversified ETF portfolios matched to your risk tolerance along with dividend reinvesting, automatic rebalancing, and tax-loss harvesting (for taxable accounts). You simply set up recurring deposits and the algorithms handle the portfolio management. Most robos have no minimums or fees under a certain threshold.
Benefits
- Fully automated passive investing
- Low account minimums and fees
- Advanced portfolio management features
Drawbacks
- Limited customization options
- Higher fees once account balances grow
- Still subject to normal market volatility
This table shows a hypothetical robo-advisor growth projection with dollar cost averaging:
| Initial Investment | Annual Addition | Years Invested | Annual Return | Ending Value |
|---|---|---|---|---|
| $5,000 | $0 | 20 years | 6% | $19,403 |
| $0 | $3,000 | 20 years | 6% | $107,077 |
| $5,000 | $3,000 | 20 years | 6% | $126,480 |
“Do not wait; the time will never be ‘just right’. Start where you stand, and work with whatever tools you may have at your command, and better tools will be found as you go along.” – Napoleon Hill
4. REITs
Real estate investment trusts (REITs) can also be solid long-term dollar cost averaging investments. REITs own and operate real estate properties and are mandated to pay out 90% of taxable income to shareholders as dividends.
I like diversified REIT ETFs like VNQ for dollar cost averaging. You gain exposure to various commercial and residential property types across the U.S. economy. Over time, those rising dividends can really compound wealth.
Benefits
- Liquidity and diversification across real estate
- High dividend yields with payout growth
- Inflation hedge with moderate volatility
Drawbacks
- Subject to risks in underlying real estate
- Long periods of flat or negative returns
- Vulnerable to rising interest rates
Assuming a 4% annual dividend yield and 5% annual share price growth, here is an example 20-year REIT dollar cost averaging scenario:
| Initial Investment | Annual Addition | Years Invested | Annual Return | Ending Value |
|---|---|---|---|---|
| $10,000 | $0 | 20 years | 9% | $75,116 |
| $0 | $3,000 | 20 years | 9% | $141,683 |
| $10,000 | $3,000 | 20 years | 9% | $216,799 |
“The stock market is designed to transfer money from the active to the patient.” – Warren Buffett
I hope this listicle gives you some strong dollar cost averaging ideas to pursue in 2024 and beyond. The key is sticking to a consistent schedule and letting the power of compounding go to work. Stay patient and let time do the heavy lifting!
For more content, check out the following:
- Unleashing the Power of AI in Stock Trading: A Positive Outlook on Transformative Trends
- Unlocking Wealth: The Power of Real Estate Investment Trusts (REITs) Revealed
- The Wealth-Building Wonder of Dividend Investing: Turbocharging Returns for All Investors
Note: This blog post is written by a professional trader and investor based on personal experiences and opinions. It is not intended as financial advice. Always conduct your own research and consult a financial advisor before making any financial decisions.
