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Dollar Cost AveragingBy Roger Sorensen
Dollar Cost Averaging is the act of investing a set amount of money at regular intervals with the intention of averaging the cost of shares purchased, evening out the market's peaks and troughs. Your money purchases fewer shares when the market is up and buy more when it's down.
You will not achieve the magic results of buying at the market's low point and selling at its high point, though you will not suffer the consequences of doing the opposite. In a generally rising market, you have the opportunity to accumulate wealth over time in a systematic, organized way.
In the long run, it doesn't matter when you start, just that you start. In the scope of years it makes little difference whether the market was up or down when you began. The market has averaged almost 10% growth since 1929, even when you include the sustained decline of 2000 and the dozen or so bear markets.
Making monthly additions to your account allows you three times as many opportunities to benefit from favorable market swings as investing on a quarterly basis. You are also provided with three times as many chances to buy in a decreasing market. The more frequently you invest and the longer you keep investing, the smoother the average-share-cost line becomes.
A market decline can mean bargain prices on your favorite stocks. Unless you are selling shares, a fund's price quote in the daily paper is not relevant to you so don't panic if it is down. In fact, a downturn provides the opportunity to buy more shares at attractive prices - shares that have the potential to grow in value when the market returns to an upward growth pattern. In order for dollar-cost averaging to work, you have got to be prepared to commit the financial resources and have the resolve to make the contributions on each appointed date.
Since you don’t know what the markets will do in the future, dollar cost averaging protects your assets by buying into the market at regular intervals. Regular investing does not ensure a profit and does not protect against loss in declining markets, it is an investment technique to help you accumulate wealth over a long period of time.
Investors should consider their ability to invest continuously during periods of fluctuating price levels and their tolerance for risk before deciding on an investment strategy. A talk with their favorite financial advisor can help them understand their risk tolerance.
Copyright Roger Sorensen
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