There are many different strategies that can be used to take full advantage of investing opportunities and help you reach your financial goals; one such strategy is called Dollar Cost Averaging. Dollar Cost Averaging is investing a fixed amount at regular intervals of time which helps to remove the emotion attached to fluctuating investment prices and the temptation to “time the market” while being able to take advantage of market volatility. It’s an automated approach that can build wealth and make short-term volatility of the market work to your benefit.
Below are some of the details behind how and why this type of investing can be so effective:
What is dollar cost averaging? It’s when you commit to buying a fixed dollar amount of an investment (usually a common stock or mutual fund) at regular intervals over a period of time. It forces you to automatically buy shares at varying prices in order to lower your average price per share.
How does it work? While the amount of money you invest at each interval is always the same, the number of shares your money will buy varies based on market fluctuations. This naturally helps you buy at different points to average out the cost per share.
What are the benefits? Instead of your returns being determined by one specific entry price, they’re determined by an average of all your entry prices. Purchases of shares are able to be spread out over the course of months or years. When the market has a downswing and the price per share declines, you’re able to purchase more shares. And when the share price goes back up, you buy fewer shares. Over the long-term, that can have an effect on lowering your overall per share price.
Who should use this method? Dollar cost averaging is suitable for those investing somewhat longer-term as the market can have lengthy upturns and downswings. This is also a strategy for new investors because there can be relatively small investments needed to get started, and it takes away the pressure of trying to time the market. If you’re making contributions to workplace retirement plans and IRAs, you’re likely already doing this!
While everyone is different and will have different investment strategies based on needs, dollar cost averaging is an uncomplicated, yet effective strategy designed to help clients reach financial goals while hedging risks involved. If you have questions or would like to discuss further, please reach out, we are always happy to help you determine the best financial path for you.