Financial advisors often recommend that their clients establish a systematic plan to invest in the stock market. A great way to do this is through dollar cost averaging. This strategy involves buying stocks or other assets at fixed intervals, regardless of market prices. This way, you buy more shares when they’re cheap and fewer shares when they’re expensive. The result is that your average cost per share is much less than if you bought a fixed quantity of shares all at once. If you have a limited amount of money to invest in the stock market — perhaps because you’re just getting started with investing or you’ve hit a financial rough patch — dollar cost averaging can help you get the most out of your capital.
What Is Dollar Cost Averaging?
Dollar cost averaging is a strategy for investing a fixed amount of money on a regular basis. If your goal is to build long-term wealth, dollar cost averaging may just help you get there.
How to Implement Dollar Cost Averaging
Firstly, identify your investment goal and expected time frame. Before you invest, you need to decide the amount of money that you want to invest and the time frame in which you plan to invest it. Secondly, determine your monthly investment amount. Once you’ve decided how much money you want to invest, divide that amount by the number of times you plan to invest in a given year. This is the amount that you’ll invest each month. Lastly, choose an investment strategy. You can invest in almost anything with dollar cost averaging, including stocks, mutual funds, bonds, or a combination of assets. Finding a financial advisor that can help you in identifying your risk tolerance and suitable investments may be your next step here.
The Advantages of Dollar Cost Averaging
Dollar cost averaging allows investors to take advantage of rising prices by buying fewer shares when assets are expensive and more shares when they’re cheaper. This can help investors ride out short-term fluctuations in the market and reduce their risk. Dollar cost averaging also requires less cash upfront, which can be useful for investors who are just starting out or have limited funds available to invest. Investors who have a long-term outlook, a tolerance for some risk and a low-cost investment strategy can benefit from dollar cost averaging. Dollar Cost Averaging can also help reduce the risk of investing too much money at a time when an asset is either expensive or underperforming.
Bottom line
Dollar cost averaging is a strategy that is usually best reserved for long-term investments. If you want to make a quick profit, this strategy may be different than the one you are looking for. Dollar cost averaging can be used with any type of investment, but it works best with long-term investments that have low upfront costs. It’s important to remember that no strategy is fail-proof, and dollar cost averaging is no exception. While it can address risk, decrease the likelihood of making a poor investment and increase the likelihood of earning a higher long-term return, it cannot guarantee any of these outcomes. For ideal results, you must have a long-term outlook and be willing to ride out the short-term ups and downs of the market. For real time advice on the best practice of dollar cost averaging, it may be wise to speak with your financial advisor.
Photo by Wance Paleri
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.