The TSP makes it easy to be consistent about saving for retirement since you are able to make contributions through payroll deductions. By doing so, you are using an investment strategy called dollar cost averaging.
Dollar Cost Averaging
Dollar cost averaging is the practice of investing a fixed amount of money at regular intervals regardless of market conditions or asset prices. You buy more shares when market prices are low and fewer shares when market prices are high. The end result is that your purchase price per share is lower than the average price of the shares over time.
| Period | Investment Amount |
Share Price |
Shares Purchased |
|---|---|---|---|
| Jan | $240 | $20 | 12 |
| Feb | $240 | $15 | 16 |
| Mar | $240 | $12 | 20 |
| Apr | $240 | $24 | 10 |
| Total | $960 | $71 | 58 |
Your cost per share = $16.55
As the table shows, by investing gradually over the four periods, you would have paid less than the overall average price of the shares: $16.55 per share rather than $17.75 per share.
Although dollar cost averaging will not protect you against losses when the stock or bond markets are declining, it does reduce your risk of investing by ensuring that stock and bond purchases are made at a variety of prices, buying more shares at lower prices and fewer at higher prices. Dollar cost averaging also eliminates the risk of investing all of your money in the stock or bond market at market peaks.
