Is Dollar Cost Averaging a Sound Investment Strategy?
Dollar-cost averaging is a strategy in which a person invests a fixed dollar amount on a regular basis, usually monthly purchase of shares in a mutual fund. When the fund’s price declines, the investor receives slightly more shares for the fixed investment amount, and slightly fewer when the share price is up. It turns out that this strategy results in lowering the average cost slightly, assuming the fund fluctuates up and down
Dollar-cost averaging is carried out simply by investing a fixed dollar amount into your mutual fund (or other investment instrument) at pre-determined intervals. The amount of money invested at each interval remains the same over time, but the number of shares purchased varies based on the market value of the shares.
When the markets are up, you buy fewer shares per dollar invested due to the higher cost per share. When the markets are down, the situation is reversed and you purchase a greater of number of shares per dollar invested. It’s a strategic way to invest because you buy more shares when the cost is low, so you get an average cost per share over time, meaning you don’t have to invest the time and effort to monitor market movements and strategically time your investments.
Dollar-cost averaging – the basic premise behind employer-sponsored savings plans like is the practice of investing a set amount each month in a particular investment vehicle. As the share price of your investment fluctuates, so will the number of shares your set amount buys. Sometimes you’ll pay more and sometimes the stock or mutual fund will decrease in value, allowing you to purchase additional shares.
With the vast and varied information available on investing, many have chosen to stop chasing yesterday’s high returns. Using dollar-cost averaging helps them ride out the ups and downs of the market.
Dollar cost averaging involves continuous investment in securities, regardless of fluctuating price levels. Investors should consider their ability to continue purchases through periods of low price levels r chancing economic conditions. Dollar cost average does not assure a profit and does not protect against a loss in a declining market.
Dollar-cost averaging isn’t for everyone. Short-term investors and those concerned about market volatility won’t benefit from the slow and steady pace of dollar-cost averaging. Always meet with a financial professional before investing. For those who want to invest a consistent amount each month and potentially lessen the effects of market volatility, it might be an option.
The main conclusion I can draw that one should not delay investing. If you want to invest, say, $100 in a mutual fund in a year, you should start invest immediately. If you have $1,200 spare money to invest on the first work day of January, split it to quarterly or monthly, as the markets could be on a high on 1st January and you are stuck with the same purchase price. It also helps make investing easier to budget, as the same dollar amount will be purchased at regular, predictable intervals.