Slow and Steady

Our eagerness to serve masked our lack of experience and know-how. Here we were—ten members of a Work & Witness team in a foreign land with the responsibility to set about 2,400 square feet of porcelain floor tile. After a quick training session, a couple of guys on the team set up the cutting station. The rest of us divided into work groups and began laying out the plan for each of the rooms. We quickly discovered the rooms were not square—not even one corner formed a 90-degree angle. What amounted to a small variation the length of a 12-inch tile could be more than an inch at the other end of the room. We saw up close the fact that small things can make a big difference.

A sore back in the morning is evidence of an imperceptible leak in the air mattress. A few miles per gallon more can save hundreds of dollars in auto expense over a year. A dripping faucet or leaking toilet can waste gallons of water in a brief time. Even the smallest of seeds, Jesus said, will grow into a large shelter for birds.

Modest, Regular, Over Time

The principle applies to personal finance, too. A modest financial step, when repeated regularly, will make a large difference over time. Whether gathering resources for a financial goal like the down payment for a house, or paying off student loans, most of us will make progress through slow and steady steps.

Modest. Several years ago, I received a small bank in the shape of a basketball for my birthday. Setting on top of the chest of drawers in my bedroom, the basketball bank collects all the change from my pockets at the end of every day. My wife, Judi, recently took the coins to our neighborhood store that has a Coinstar kiosk that counts the change. We received a gift card for $67.03.

According to news reports, during the current economic turmoil people have been relying more on pocket change. Coinstar has experienced a 39 percent growth in revenue over the past five years. Even modest steps help our finances.

Regular. A declining financial market puts a dent in the motivation to save for retirement. It has been downright depressing in the past couple of years to open my quarterly statement for the account intended to provide financial security in retirement. The temptation is strong to skip the regular contribution when it seems like the sky is falling. Allowing emotions to short-circuit a financial strategy, however, doesn’t help us to reach long-term financial goals. Habitual contributions, no matter how modest, will keep financial progress moving in the right direction.

Over Time. Financial news in recent days suggests the recession is beginning to ease. Since consumer spending accounts for about two-thirds of the economy in the United States, economists and politicians encourage increased spending to speed the recovery in the short- to mid-term. Consumers these days, however, are prone to be saving more and borrowing less than in the past. That’s a much-needed correction over what has been the case in the build up of the economic bubble that finally burst. The increased savings rate will, over time, provide more long-term financial stability to American families.

Dollar Cost Averaging

One method of investing modest amounts at regular intervals over time is called “dollar cost averaging” (DCA). To get started with DCA, select the amount to be contributed toward the goal. Select a dollar figure you will be able to sustain, and determine when you will make regular contributions, say $25 per week or $250 per month or $1,000 per quarter.

I ran an experiment with information from a mutual fund in the Nazarene 403(b) Retirement Savings Plan in which I have invested part of my retirement funds. In my experiment, I assumed a contribution of $416.67 ($5,000 over 12 months) on the 11^th of each month for a year. Using actual figures for the “net asset value” (NAV) of the mutual fund, that is, the closing price per share for that date, and reinvesting all dividend payments to purchase additional shares, I calculated the value of the investment at the end of the year.

The investment climate in 1998-1999 (ten years ago) was generally favorable, an “up” market. Using dollar cost averaging from July 1, 1998, to June 30, 1999, the return was 15.5 percent greater than the amount contributed during the year. If all $5,000 had been invested at the beginning of the period, the return would have been 12.7 percent—still a wonderful increase but not as good as what slow and steady would have provided.

The investment climate in 2008-2009 was generally unfavorable, a “down” market. The NAV of the mutual fund trended down from July 2008 to March 2009, then trended up from March to June. Using dollar cost averaging from July 1, 2008, to June 30, 2009, the return was -0.6 percent, a slight loss. If all $5,000 had been deposited at the beginning of the period, the return would have been -30.0 percent. This example shows that during a down market it is beneficial to continue regular contributions—no matter how modest. Over time it will pay off.

So what causes this to work? If a person invests the same dollar amount regularly, then when the price per share is lower the contribution purchases more shares. For example, $416.67 will purchase 8.978 shares at a NAV of $46.41. When the NAV drops to $23.90, however, the $416.67 will purchase 17.434 shares. Buying more shares when the price is low pays off big time when the price begins to move up.

In Aesop’s fable, the hare ridiculed the tortoise for the laborious pace with which he ran, but the tortoise crossed the finish line before the scatter-brained hare. Slow and steady wins the race.

Originally published by Pensions & Benefits USA.