Limit the Risks of Investing with a Smart and Simple Investment Plan
For average investors looking for more involvement and control than 401k investing or mutual funds can provide, dollar cost averaging is a great option. Dollar cost averaging is also a good strategy for investors who want to get involved in the market, but don’t have a large lump sum of money to invest at a given time. Dollar cost averaging takes out much of the risk incurred when large investments are made at once. It allows investors to commit a set amount of money to purchase stocks on a consistent basis.
Dollar Cost Averaging Basics
The concept of dollar cost averaging is fairly simple. Investors determine how much money to invest, in which stocks to invest, and how frequently to purchase shares. Once those decisions are made, investors can simply set it and forget it. So, an investor may choose to invest $100 a month in a company, or a few different companies. In a short amount of time, they would have constructed a nice little investment portfolio over which they have total control to go along with their more passive 401k and mutual fund investments.
Advantages of Dollar Cost Averaging
Perhaps the biggest advantage to this investing strategy is that it enables everyday investors to remove some- only some- of the risk inherent in stock investing. By allocating a set amount to invest each month, investors are forced to buy fewer shares of stock when the price has risen and scoop up more shares when the stock price drops. This helps level out some of the volatility seen as stock prices fluctuate, which they have done to extremes recently.
No matter what any so-called investing pundit or fund manager tries to tell investors, it is impossible to consistently time the market. Just looking at the past two years shows how erratic the market can be. It went from all time highs, to plummeting 50%, back to gaining 50% in virtually the blink of an eye. Investors who jumped out of the market after it crashed missed out on huge gains. Those who saw the rise as never ending and went all in near the peak saw their funds cut in half. However, many investors who followed a dollar cost averaging strategy, though still losing money at the worst of the market, were not hurt as badly as others who tried to time the market.
Though there is no magic, moneymaking ploy that never fails, dollar cost averaging levels the playing field and can provide everyday investors with a solid long-term approach to successfully earn money in the stock market. If investors make wise decisions and stick to a consistent strategy, they will reap the rewards of investing success.