Have you thought about investing but it never feels like the right time? Have the ups and downs of today’s market steered you away from investing and into cash or low interest rate saving accounts? Even within volatile markets there are still opportunities for investment return, especially if you are seeking long term growth.
Predicting when an investment is at its highest or lowest price is very difficult but this doesn’t mean you need to sit on the sidelines. If you’ve thought about investing for a long-term goal but the market volatility scares you, dollar cost averaging may be a good strategy for you.
Dollar cost averaging (DCA) is a strategy that can be effective for long-term investing even as prices fluctuate up and down. DCA is an investment strategy where you invest equal amounts of money on a routine basis in an individual stock or a portfolio. It does not prevent you from losses or guarantee you profits but what it does is reduce your average cost per share by purchasing more shares when prices are low and less shares when prices are high.
For example, if you invest $100 for three months in ABC mutual fund. In January, ABC is worth $25 a share, therefore, you purchase 4 shares. In February, ABC is now worth $20 a share, so you are able to purchase 5 shares. In March, ABC is worth $15 a share, so you purchase 6.7 shares. You would now own 15.7 shares of ABC with an average cost of $19.11.
If you have a retirement account where you are making automatic deferrals from your paycheck into stocks or mutual funds, you are already using the dollar cost average strategy. As you may know from investing in your 401K or retirement account, one of the main benefits of this strategy is the discipline of automatic investing.
While buying low gives you the opportunity for appreciation, many of us know it’s very difficult to muster the courage to buy a stock or fund when the price is low, especially in volatile markets, because we fear that the price may go even lower.
With DCA you are not trying to time the market. When the prices are low you are buying more shares and when the prices are high you are buying fewer shares. DCA is a strategy that over time can decrease your risk in a declining market. However, in a rising market, investing a lump sum may give you higher returns.
Investing in volatile markets can be daunting but if you are leaving your money in low interest bearing accounts, you may be missing opportunities for potential return. Dollar cost averaging is a strategy that can give you the discipline to invest without trying to time the market.
Disclosure: Investing regular amounts steadily over time (dollar-cost averaging) may lower your average per-share cost. Periodic investment programs cannot guarantee profit or protect against loss in a declining market. Dollar-cost averaging is a long-term strategy involving continuous investing, regardless of fluctuating price levels, and, as a result, you should consider your financial ability to continue to invest during periods of fluctuating price levels.