April 21, 2010

Dollar Cost Averaging Is Why 401k's Work and Buying Individual Stocks Doesn't

Dollar cost averaging (and time) is exactly why 401k's are so successful.  People mindlessly (in a good way) add to a diversified portfolio when its up, and when its down.

Buying more when your individual stock goes down is exactly why people rarely make money outside of 401k's. You know the scenario, you buy XYZ and it goes down, you buy more and more and again and again until your portfolio has ten or fifteen losers in it. You hold until breakeven (if you are lucky) and sell, whew, only to try again, most times with the 'aid' of a stockbroker.

Thats why I tell people to buy no load mutual funds or etf's and treat monies inside and outside of 401k's the same. Its a winning strategy so don't mess with it.

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