I just had this brilliant idea, and I do not know why I did not think of it sooner. I max out my Roth IRA every year ($5,000 per year), and I usually do so by dollar cost averaging. I deposit $415 every month into my mutual fund account to buy shares with no thought as to what the share price is right then. I’m consistent. I buy when the price is up, and I buy when the price is down.
Like most people, my 401-k and Roth IRA have been severely beaten up by the market’s downturn this month. The main mutual fund that I use to invest for my Roth IRA has been down almost 50% from its peak last year. I am actually down 30% because I have been dollar cost averaging. I deposit my money in the mutual fund in the middle of the month after my second paycheck. I get paid twice a week. So, I still have three more $415 payments left to make this year.
I really like my mutual fund. I did a lot of research finding the perfect one, and I really believe in their investment philosophy. They made some rather large investments in Wachovia Bank, and the mutual fund’s share price has been rightly beaten up for the mistake. But, I’m a long term investor. I am still decades away from retirement, and my mutual fund’s philosophy has not changed throughout the financial market’s current turmoil. This is a classic buy low scenario. My only regret is that I do not have more money to invest at today’s crazy low prices. There are a lot of great companies and mutual funds that have been severely beaten up and depressed more than their fundamental values would normally suggest. Now is a great buying opportunity.
So, since my mutual fund’s share price is down considerably from its 52-week high, this is the perfect buying opportunity. I had a little bit of money sitting on the sidelines. So, I decided to in essence “prepay” my next three $415 payments to the Roth IRA. I just invested a lump sum amount for the last quarter of the year instead of monthly. I’ll use the money that I would have paid into my Roth IRA to payback the savings account that my lump sum money came from.
I have a feeling that in two or three years, this early $1,200 will pay for itself over and over again when my mutual fund’s share price is back up where it once was.
What about you? Are you putting extra money into the market?