You may have heard of dollar cost averaging, which is the process of making small investments at regular intervals over time. But have you tried it? You may find it worthwhile because it can be an effective investment strategy.
Dollar cost averaging establishes discipline; you build a habit of regular investment to help you reach your long-term goals. And by investing regularly over time, you’re not worried about trying to time the market.
In fact, it can help you take advantage of market fluctuations. Because you invest the same dollar amount each period, you typically purchase more shares when prices are low and fewer shares when prices are high. This means that over the entire purchase period, your average cost per share could be lower than the investment’s average price per share.
Dollar cost averaging works for just about any type of investor with any amount of money to invest. If you don’t have much to invest, dollar cost averaging can be a great way to ease into investing because you can start with a relatively small amount of money.
On the other hand, if you have a large sum to invest (such as an inheritance or proceeds from the sale of a home), you can put it into a savings or money market account, then move small portions into a stock or bond mutual fund over time.
Of course, deciding whether to use a dollar cost averaging strategy depends on your individual financial situation.
Your advisor can help you make the right choice.