Your Money Question: With investments, the hare usually wins

October 3, 2007

Each January, I put my first few paychecks into my IRA and 401(k), until I reach the contribution limits, to get a quick start on compounding. My partners invest theirs in equal amounts over the year, arguing that dollar cost averaging is better. Which strategy is best?

Q. Each January, I put my first few paychecks into my IRA and 401(k), until I reach the contribution limits, to get a quick start on compounding. My partners invest theirs in equal amounts over the year, arguing that dollar cost averaging is better. Which strategy is best?

A. That depends on a variety of factors, including the types of securities you choose and how long you'll leave the money invested. But as long as the overall market continues to trend upward over the long term, the odds seem to favor investing as much as possible early in the year. In one of the most in-depth studies on the subject, which compared the two strategies using market returns for every possible 12-month period from 1926 through 1991, lump sum investing won out roughly two-thirds of the time.

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