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Investing in Your Future and Keeping Risk in Check

Choosing the right time to invest is a dilemma that all investors face. Is the market heading up or down? What will happen tomorrow — or next month? Unfortunately, no one has the answer to these questions, even the financial experts.

What investors do have is a built-in strategy that takes the guess work out of choosing the right time to invest and helps manage investment risk at the same time. And the good news is, if you are contributing to your retirement plan, you are using this strategy without even realizing it.

Dollar-cost averaging helps smooth out the bumps

When you put money into your retirement account, you’re automatically using a strategy called “dollar-cost averaging.” Here’s how it works. Each pay period money is automatically taken out of your paycheck and put into your retirement account. It’s invested in the fund or funds you chose, regardless of how they are performing.

Now, wouldn’t it be great if we could always buy low and sell high? Unfortunately, we don’t know exactly what’s going to happen in the market. Sometimes you will buy low, and sometimes you won’t. Over time, dollar-cost averaging could help reduce the impact of volatility on your account. When prices are lower, you’re buying more shares. On the flip side, when prices are higher, you’re managing risk by moderating the average purchase price over time. Dollar-cost averaging happens automatically; you don’t have to constantly watch the market to try to figure out when to invest.

Investors should understand that a periodic investment plan such as dollar-cost averaging does not assure a profit or protect against a loss in declining markets. Since such a strategy involves continuous investment, the investor should consider his or her ability to continue purchases through periods of low price levels.

Dollar-cost averaging in action

Let’s take a look at an example that illustrates how dollar-cost averaging may help.

  • Jennifer invests $4,000 in one lump sum.
  • José takes advantage of dollar-cost averaging by investing $4,000 over ten months in his retirement plan.

Investment Share price Total number of shares purchased Average share price
Jennifer
$4,000 invested in one lump sum
All shares purchased at the same price of $20 per share
200
$20
José
$4,000 invested over ten months ($400 each month)
Over ten months, share price ranged from $15 to $23
220.6
$18.50

In José’s example, below are more details on how many shares he was able to purchase with his $400 each month.

Month
Price per share
Number of shares purchased
Month one
$20
20
Month two $16 25
Month three
$17 23.5
Month four
$21 19
Month five
$18 22.2
Month six
$22 18.2
Month seven
$23 17.4
Month eight
$15 26.7
Month nine
$17 23.5
Month ten
$16 25

Examples are for illustrative purposes and not indicative of historical or future results of a particular investment. Estimates are based on the assumptions noted, do not guarantee or imply a projection of actual results, and do not include the effect of taxes or fees. Wells Fargo cannot guarantee results under any savings or investment program and cannot guarantee that you will meet your retirement savings goal.

Even though some months José paid more per share than Jennifer did, his average share price was $1.50 (15%) less. Over time these savings can really add up. For example, if both Jennifer and José sell their shares in the future for $30, here’s what they would have:

  • Jennifer sells 200 shares for $30 per share for a total of $6,000
  • José sells 220.6 shares for $30 per share for a total of $6,618

José ends up with $618 more than Jennifer. While this may not seem like a lot, when it comes to saving for retirement every extra dollar counts. Given the power of compounding, after 30 years an extra $618 could translate to $4,700 more in José’s retirement plan!

Contribute to your retirement plan and you’ll be dollar-cost averaging

If you’re regularly contributing to your retirement plan, you are already taking advantage of the power of dollar- cost averaging. You can contribute as little or as much as you want, and still take advantage of the power of dollar-cost averaging. Visit the Wells Fargo website to enroll in the plan and get information about dollar-cost averaging and other investment topics.