We all know we should buy low and sell high, but determining when that occurs is difficult. Thus, consider using a strategy like dollar cost averaging to help with those decisions.
Dollar cost averaging involves investing a set amount of money in the same investment on a periodic basis. For instance, instead of investing a lump sum in one stock immediately, you might invest $2,000 in that stock at the beginning of every month.
Utilizing this strategy can provide several benefits:
- Dollar cost averaging requires the discipline to invest consistently, regardless of market fluctuations. Thus, it reinforces the habit of regularly setting aside money for investing.
- For many investors, one of the more difficult aspects of implementing an investment strategy is deciding when to invest. Fear of investing at a market high can keep investors waiting on the sidelines. With a dollar cost averaging program, you just follow the plan and invest on a periodic basis, without trying to time the market.
- Since you are investing a fixed amount of money, you purchase more shares when prices are lower and fewer shares when prices are higher. Thus, your average cost per share is typically lower than the average market price per share over the same time period.
- Since you are spreading your investment over a period of time, it keeps you from investing all your money at a market high.
Dollar cost averaging, however, does not ensure a profit or protect against loss in declining markets. Before starting a dollar cost averaging program, you should consider your financial ability to continue purchases through periods of low price levels.