Dollar Cost Averaging in the 401(k) 

Because the stock market has ups and downs over the years, investing should be performed on a long-term basis. This is the principal of dollar cost averaging: by investing a set amount of money from each paycheck in the same investments, whether high or low in price, this reduces the investment risk:

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In the above figure, $100 purchased 10 shares in January and 20 shares in February. By dividing $200/30 shares the average comes $6.6. By investing this way you reduce risk by staying in the middle. To feel the true effects of this type of investing, it needs to happen over a long time horizon.

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Eggs in One Basket ​

When investing, it is important to refrain from putting all your eggs in one basket. This means investments are made between a few investments hence, all the money goes into perhaps a couple of places. In some cases, people have chosen just one mutual fund or simply invested in company stock.

 

By doing this, you would be risking most or all your investments on the strings of a few funds. If the investments were to falter you would sink right with the ship. Not to say that you would not benefit if the investments perform well, but you are better off spreading the money out between at least a few funds to start and then branch out from there as the money grows.

 

Investors have been burned most notably three times since 2001. The first time was during the dot com bubble, followed by the financial crisis in 2008 as well as the Coronavirus pandemic beginning in 2020.

 

In 2001, Enron went defunct and two of Detroit's automotive companies required a government bailout in 2008. These are events that no one can accurately predict, and this is where the eggs in one basket theory burned many. There are many people that lost their entire retirement at the time and have not recovered to this day.