Wouldn’t it be nice to have a crystal ball or a time machine to look into the future of your investment portfolio? The problem is, there’s no such thing, so we have to honestly ask ourselves, can I pick the right time to buy or sell my investments? Do I have the ability to make financial decisions without my emotional side interfering? Am I experienced enough to do any of this? The dollar cost averaging strategy helps to achieve all of these important investment objectives.
Dollar cost averaging is a method of consistent investment over a period of time. If you participate in a 401(k) at work, for instance, you are inadvertently using dollar cost averaging, as you automatically invest a portion of your paycheck into your retirement account each pay period over your career.
Deciding when to buy or sell an investment is called market timing. Market timers spend all their time researching and analyzing trends in the market to predict when the cost of a particular investment will go up or down. When using dollar cost averaging you enter the market at your own pace by picking a start date and an end date. A financial planner may be helpful in incorporating dollar cost averaging into your retirement plan.
We all have heard the golden rule of investing; “buy low and sell high.” Regretfully, our emotions can get in the way and we tend to buy high and sell low out of fear of what the market may do next. Using dollar cost averaging you’re investing the same dollar amount each period which leads you to buy fewer shares when the price is high and more when it’s low.
Let’s look at a hypothetical scenario and see how dollar cost averaging works.
When you put your dollar cost averaging plan into effect and make periodic investments automatically, you may reduce the emotional frustration of market fluctuations. Dollar cost averaging can help you keep with the golden rule.
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