Basics of Dollar Cost Averaging
Dollar-cost averaging is a popular method of investing for the long term.
If you’ve been burned before by buying high and selling low, you may want to consider putting your investments on cruise control with dollar-cost averaging.
Dollar-cost averaging – the basic premise behind employer-sponsored savings plans like 401(k)s – 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.
By year-end 2014, Americans had $24.7 trillion invested in IRAs, employer-sponsored savings plans and annuities, according to the Investment Company Institute’s 2015 Investment Company Fact Book. With the vast and varied information available on investing, many Americans have chosen to stop chasing yesterday’s high returns. Using dollar-cost averaging can help 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 or changing economic conditions. Dollar cost averaging does not ensure 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 may be an option. Article by Securities America