Dollar Cost Averaging
What is Dollar Cost Averaging?
Successful investing means buying low and selling high. But predicting the right timing is nearly impossible when markets go up and down every day. Very few investors succeed at timing when to buy or sell an investment.
One strategy to benefit from market highs and lows without having to get the timing right is called dollar-cost averaging.
One strategy to benefit from market highs and lows without having to get the timing right is called dollar-cost averaging.
- Dollar-cost averaging involves investing a set amount at regular intervals through all types of market conditions.
- Lump-sum investing means investing a larger amount of money all at once.
- Market timing refers to the act of trying to predict the future direction of markets and attempting to profit from making the right prediction
While dollar-cost averaging has been the tried-tested-and-true method for generations of savers, it’s impossible to know whether the market will rise or decline over a given period of time. Dollar-cost averaging helps take the emotion out of investing. It removes market timing from the investment decision.
3 Steps to Consider
1
Start Early
The more time you have to invest, the more your money can grow. The market has a tendency to rise over time, so you’ll want to start saving as soon as possible to benefit.
2
Don't Focus on Unit Prices
It’s best to ignore short-term fluctuations in prices of different funds. Instead, focus on accumulating more units at regular intervals. Keep an eye on your long-term investment goals. When prices fall, you can accumulate more units at a lower cost.
3
Prepare for Market Ups and Downs
Dollar-cost averaging is a way to take the emotion out of investing and avoid the temptation of market timing by making regular investments. Remember to take a long-term perspective and focus on your end savings goals, even in a down market.
The Bottom Line
Dollar-cost averaging is a regular commitment to paying yourself first despite market fluctuations. It’s a disciplined saving strategy that makes sense for many investors since it takes the guesswork and emotion out of investing. An advisor can help you set up an investment plan involving regular contributions that makes sense for your situation. An advisor can also help you monitor and rebalance your investments when necessary to help you avoid selling low and buying high.
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