Investing is a way of making your money work for you. It should be easy and fun to do, not a chore.
Legendary investor Warren Buffett defines investing as “the process of laying out money now to receive more money in the future”. Sure, that sounds simple enough. However, investing is often considered complicated and, at times of market volatility, quite daunting, owing to an array of potential risks. Which is why lots of people refrain from even trying.
Nevertheless, there are some investment strategies specifically designed to make the journey fun and easy, including some that are aimed at beginners looking to go from zero to hero. One such strategy: Dollar Cost-Averaging.
The Dollar Cost Averaging Strategy
Dollar Cost Averaging (also known as the “Constant Dollar Plan”) is an approach to investing that involves periodically investing a fixed amount of money into targeted financial assets using pre-set time intervals agnostic to market swings. The approach can neutralize short-term volatility while helping to build, over the long haul, savings and wealth.
Dollar cost averaging takes the emotion out of investing. Stock investors buy, for example, fewer shares when prices are high, and more when prices are low.
But let’s investigate its pros and cons a little further:
- Reduces market volatility.
- Takes emotional factors out of the decision making processes.
- Averages out share price fluctuations.
- Removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices.
- Rather than entering and exiting different positions, you build a position in a stock, bond or fund, which can prove beneficial especially when you can’t afford a large sum of money to invest.
- Can have lower returns. Stock markets tend to rise over time and, therefore, leaving money out of the market can miss out on big gains.
- Can incur more fees. Buying more frequently adds to trading costs. However, if one is investing longer-term, fees should become very small relative to the overall portfolio, as one is buying for the long haul, not trading in and out of the market.
As with anything else in life, the “DCA” strategy has both advantages and disadvantages to be carefully considered together. Whether it’s the right strategy for you could depend on a given moment in the markets alongside myriad other considerations, such as risk-tolerant and overall financial prosperity and priorities. Be careful out there.