There is the age old investing adage that if you want a greater return you must have greater risk. However, not everyone is comfortable with greater risk. As a way to ease into the markets, you may instead elect to follow a more conservative strategy called “dollar cost averaging”. With dollar-cost averaging, you consistently invest your money in equal amounts no matter what is happening in the stock market. It is a systematic approach that slowly builds a strong position in a security with less risk.
This chart is for illustrative purposes only and is not intended to represent the performance of any security. The illustration does not include commissions or fees.
Past performance does not guarantee future results.
Many people participate in dollar cost averaging investments without even knowing it. Any 401(k) or another type of defined contribution plan is a dollar cost averaging investment if your contributions are allocated to one or more investment options on a regular schedule such as with each paycheck.
Buying low and selling high is obviously an efficient way to make money investing, but it’s easier said than done. Oftentimes, investors who try to time the market in this way only succeed in buying or selling at the wrong times. Dollar cost averaging takes the guesswork out of it by investing consistently whether the market is up or down.
Over time, dollar cost averaging can help you reduce your risk and even help limit your losses when the market falls. Additionally, it allows you to, on average, pay less per share by buying more shares when the price is low and less when the price is high.
It’s vital to consider potential returns and your risk tolerance when creating an investment strategy that fits your goals. If the most important thing for you is to save money and stay invested for the long term, dollar cost averaging can help you do that.
Working with an experienced financial professional can help you decide whether dollar cost averaging is a strategy that you and your family could benefit from.
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Dollar cost averaging will not guarantee a profit or protect you from loss, but may reduce your average cost per share in a fluctuating market