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Dollar Cost Averaging
If riding the investment roller coaster makes you a little queasy, but you know you want to get in the market, here’s an investment strategy you might like.
Dollar Cost Averaging (DCA) is the practice of investing a regular amount of money at set time intervals, such as monthly or quarterly. This regular investment goes into the same investment each time, such as a stock or mutual fund or variable annuity.
You might already be used to doing something of this type by making regular contributions to your 401(k) or buying your company's stock, so the concept might already be familiar to you.
The Why’s
The idea is, that by investing consistently without focusing on the daily price of the investment, you can take advantage of the market fluctuations, instead of being at their mercy.
Once you've decide on a fixed amount of money to invest each time, your money can buy more shares when the price is low and fewer shares when the price is high. Over time, the average cost per share you bought may be lower than the average share price over the same period.
While dollar-cost averaging can help you navigate market volatility, it does not guarantee you a profit nor will it protect you from losses. But it can make investing more palatable.
A Long-Term Strategy
Regardless of the amount of money that you have to invest, dollar-cost averaging should be used as a long-term strategy. While the financial markets are in a constant state of flux, they have historically tended to move in the same general direction over fairly long periods of time. Bear markets and bull markets can last for months, if not years.
Because sometimes the trend of the market is volatile, dollar-cost averaging is generally not a particularly valuable short-term strategy
Watching the Henhouse
If you're using Dollar Cost Averaging or any other type of monthly investing plan, make sure you watch those investments as time goes by. Your goals and portfolio need to be reassessed and rebalanced periodically.
It is important to note that dollar cost averaging does not ensure a profit nor guarantee against loss. Investors should consider their financial ability to continue their purchases through periods of low price levels.
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