Saving through your employer-sponsored retirement program helps you automatically follow one of the wisest investment strategies—dollar-cost averaging.

What is dollar-cost averaging?
Dollar-cost averaging is the practice of putting the same amount of money in the same investment consistently, regardless of market activity. This is beneficial because it allows you to automatically buy more shares when prices are lower and fewer shares when prices are high. Over time, this tends to reduce the average cost of your shares.

An Example:
Let’s say you contribute $100 per paycheck to your retirement account and that your money goes toward one mutual fund for purposes of illustration. During the first month you invest, the share price of the fund is $10. Your $100 buys 10 shares.

Dollars Invested = $100
Price per Share = $10
Number of Shares Purchased = 10

The following month, you still contribute the same $100, but the price per share drops to $5.

Dollars Invested = $100
Price per Share = $5
Number of Shares Purchased = 20

The bad news is the price of the shares went down; the good news is your $100 bought 20 shares—twice as many as the month before.

A month later, as you continue to invest at the same rate, the price per share goes up to $10 again:

Dollars Invested = $100
Price per Share = $10
Number of Shares Purchased = 10

By the end of the third month, you own 40 shares. If the price of the shares had remained constant, your $100 would have purchased only 10 shares per month, for a total of only 30 shares.

Making it work for you
Dollar-cost averaging is a great "forced investment" strategy for people who might not be as good as they’d like at saving money on their own.

A great way to take advantage of dollar-cost averaging is by contributing to your employer-sponsored retirement program. Your contributions are deducted from your paycheck and invested directly into a combination of investments you’ve selected, regardless of what’s happening in the market. The sooner you begin your investment program of dollar-cost averaging, the greater your opportunity to potentially accumulate a sizable nest egg.

Please keep in mind, however, that dollar-cost averaging and other periodic investment plans do not assure a profit and do not protect against loss in declining markets.  Such a plan involves continuous investment in securities regardless of fluctuating price levels of such securities and investors should consider their financial ability to continue their purchases through periods of low price levels.