When it comes to smart investing, strategy is everything. An investment strategy is a plan for investing that you follow, no matter how the market turns. There is no one right investment strategy for everyone, so it is important that you consider your individual circumstances and goals and explore the options available to you. Many new investors, as well as investors who prefer to stay on the safe side, tend toward a practice called dollar cost averaging. Dollar cost averaging is a way of investing slowly in the market, and it has a number of advantages.
Installment investing. What is meant by “investing slowly?” Basically, rather than invest one lump sum of money up front, you contribute a specified amount to your investment fund on a monthly basis. For example, if you have $6000 per year to invest, then you would invest $500 per month, thus spacing out, or slowing down, your investment.
Spreading out risk and minimizing losses. You might wonder what the point of dollar cost averaging is, as common sense will tell you that a return on $6000 is much greater than a return on $500. So why not invest it all at once, right? While it may be true that you get a higher return on a larger sum of money, you also take a higher loss, if the market doesn’t behave as you hope. As you know, the market moves on a monthly, daily, and even minutely basis. By spreading out your investments in smaller chunks, you are actually minimizing your risk and losses.
Lowering price per share. Let’s say you choose to invest in a fund that adjusts at regular intervals, and the adjustments are $50, $35, $40, $55, and $45 per share. If you invested your entire $6000 up front, then you would pay $50 per share. However, if you divided that $6000 by 5 (the number of adjustments) to invest $1200 each adjustment, then you would be purchasing more shares when the prices were lower and less shares when the prices were higher, thus lowering your price per share.
Build your portfolio without a lot of money. One of the biggest draws to dollar cost averaging is that it enables you to build your portfolio over time, even if you don’t have a large lump sum of money to invest. Few people can come up with several thousand dollars to jump into the market, but a lot of people can put a bit of their monthly paychecks away (or into the market) each month. This is also great for people who are still working to learn how to trade stocks and don’t want to invest huge sums at one time.
Dollar cost averaging is not for everyone, but it is certainly a wise investment strategy if you are most interested in spreading out your risk, minimizing your price per share, and entering the market with a minimal amount of money. Consult with a financial advisor to choose a fund that is a good fit for you, and you can start investing today.
