![]() It takes the emotion out of investing, so you’re focused on investing a fixed amount on a specific schedule, rather than on the market’s fluctuations. That’s where dollar-cost averaging comes in. These kinds of attempts to "time the market" are notoriously unsuccessful. It’s natural to react emotionally to the stock market’s ups and downs, rushing to sell when stocks go down, and rushing to buy when the market appears to be rising. Benefits of dollar-cost averagingĭollar-cost averaging isn’t a perfect strategy (because there is no perfect investing strategy), but it offers a number of benefits, such as: Reducing the emotion of investing And because investing in the market comes with ups and downs, dollar-cost averaging is a smart way to lower your risk and maximize the potential. But nobody can precisely time the market. Of course, there are times when the stock price will go straight up for five months in a row, in which case it would have been more beneficial to invest a lump sum during the first month. As a result, you own more shares when the stock price begins rising again, and have the potential to earn greater returns. Through dollar-cost averaging, you were able to buy more shares than if you had made the entire $5,000 investment all at once (a "lump-sum investment"). In the first month, your $1,000 would have purchased 20 shares, but in the fourth month, the same investment would have purchased 50 shares. Here's how it works: imagine that over those five months, the company’s stock price fluctuated from $50 to $40, $30, $20, and $50. Dollar-cost averaging works by spreading out your investment over a period of time. Rather than making a lump sum investment of $5,000, with dollar-cost averaging, you might instead invest $1,000 each month for five months. With dollar-cost averaging, you invest the same amount of money at regular intervals, such as weekly or monthly.įor example, say you want to invest $5,000 in a particular company’s stock. Over time, your regular investments will allow you to make purchases at both market highs and lows, mitigating your overall risk. That means when the share price is high, you’re purchasing fewer shares, and when the share price is lower, you’re purchasing more shares. What is dollar-cost averaging?ĭollar-cost averaging is an investment strategy in which you invest a fixed dollar amount at regular intervals, regardless of the price. That’s why many investors use dollar-cost averaging, which allows you to invest at all levels of the market and hedge your investment risk over time. But it’s impossible to accurately predict the stock market’s ups and downs. ![]() Most people want to invest while prices are low and sell when prices are high, with the goal of making a profit.
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