Financial essentials
Understanding dollar cost-averaging and compound growth
Learn how these two key investing concepts can help power up your retirement savings.
Investing can be intimidating
There are a number of complex terms and strategies that can make an investor or retirement plan participant feel unsure about whether or not they are making the right decisions. At TIAA, we believe in providing our participants with the financial essentials they need to make informed decisions about their long-term and retirement investments.
Two key investment concepts that you may have heard of, but not felt completely confident about, are compound growth and dollar cost averaging. Here’s some essential information you need to know about both:
Dollar cost averaging
Dollar cost averaging is a strategy to invest a set amount of money on a consistent schedule vs. waiting to invest a larger amount of money at a later date. This approach can help “level out” some of the bumps in the market because a consistent investment approach can help ensure you aren’t only investing at times where the market and share prices are the highest.
The best way to understand what dollar cost averaging means in practice is a brief and simple example.
Jim & Tim both invest $1000 each month in the exact same investment options. The only difference is that Jim invests $500 from each paycheck while Tim waits to invest $1000 at the end of each month.
Let’s see how this would look over the course of one quarter:
| Month | Jim’s investment: | Tim’s investment: |
| January | 1/17: $500 @ $10 per share = 50 shares 1/31: $500 @ $12 per share = 42 shares |
1/31: $1000 @ $12 per share = 83 shares |
| February | 2/14: $500 @ $15 per share = 33 shares 2/28: $500 @ $13 per share = 38 shares |
2/28: $1000 @ $13 per share = 77 shares |
| March | 3/14: $500 @ $10 per share = 50 shares 3/31: $500 @ 12 per share = 42 shares |
3/31: $1000 @ $12 per share = 83 shares |
| End of Quarter | Total shares purchased: 255 |
Total shares purchased: 243 |
Even though Jim and Tim invested the exact same amount over the same time period, by utilizing a dollar cost averaging strategy, Jim was able to purchase 12 more shares of the investment than Tim.
Key Considerations
This example doesn’t guarantee that Jim will be able to purchase more than Tim in every month, quarter or even year, but by making set investments over time on a consistent basis – like biweekly contributions to your workplace retirement plan, you can help ensure that you are getting good value for your investment dollar by “levelling out” some of the market volatility.
Dollar cost averaging does not ensure a profit or protect against loss in decling markets. Because such a strategy involves periodic investment, you should consider your financial ability and willingness to continue purchases through periods of low price levels.
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Discover compound growth
Also referred to as compound interest, this concept refers to the growth you have received on your original contributions plus the growth earned on the previous investment performance. Take the following example:
Discover compound interest
If you invested $100 and it grows 10% in one year you now have $110.
If that account then grows 10% the next year you now have $121.
But your total account value hasn’t grown 10% over these two years…it has grown 10.5%. And, if your balance grows 10% each year – after 10 years you’ll have $259, meaning your average return was 15.9%. That’s the power of compounding growth!
Now, if you do this exercise with a significantly larger amount of money over a much longer period of time … say the 30 or 40 years you are working, you can see the positive impact it could potentially have on your account balance.
This phenomenon of potential compound growth can help you build up the value of your retirement-focused long-term investments and achieve a more secure retirement.
Key Considerations
This illustration is intended to show a hypothetical example of the principle of compounding. The example does not include the impact of any investment fees, expenses or taxes that would be associated with an actual investment. If such costs had been taken into account, the results shown would have been different. It also does not factor in market volatility.
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This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances which should be the basis of any investment decision.
The advice provided by TIAA Financial Consultants is obtained using an advice methodology from an independent third-party.
The TIAA Retirement Journey Planner is a brokerage service provided by TIAA-CREF Individual & Institutional Services, LLC, a registered broker-dealer, Member FINRA, SIPC. IMPORTANT: The projections or other information generated by Retirement Journey Planner regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.