2008 Roth IRA: Lump Sum or Dollar Cost Average?

By Flexo on Saturday, December 22nd, 2007 in Investing

The last contribution to my 2007 Roth IRA was invested last Monday. Ever since my first Roth IRA several years ago, I’ve been maximizing the contribution each year by automatically investing equal amounts twice each month. One reason for using that technique, usually known as “dollar cost averaging” was to reduce risk. With the market going up and down throughout the year, sometimes money is invested at a good prices while other times the prices are not as good.

The other option (although it certainly is possible to mix the two strategies) is to invest the entire $5,000—the maximum for 2008—in one lump sum. That would give me the benefit of having the entire year for the full amount to grow. That is, if the stock market grows next year, the full amount will grow. If the market is shaky, then I will have put my entire faith in one date in the year.

Another reason I used the dollar cost average strategy each year is it wouldn’t damage my cash flow. I didn’t always have enough savings ready to be invested, and slow, regular investments allowed me to spread out the contribution over twelve months. While I’d like to keep a large amount of cash on hand for when I eventually make a down payment on a house, if I needed to, I could withdraw Roth IRA contributions without penalty for that purpose.

On a side note, I called to stop my 2007 Roth IRA contribution at TIAA-Cref, and I intend on investing my 2008 Roth IRA with Vanguard.