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Dollar cost averaging is a simple and effective strategy of investing fixed amounts of cash at predetermined times. If you invest $1,000 every month, then you are dollar cost averaging. The strategy is easy to understand, but many of the benefits are not so obvious. [Here are 4 such benefits:]
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- It is a great way to get started investing for your retirement. There is no need to learn about complex technical indicators or valuation metrics.
- It guards against the great danger of buying in big at the end of a bull market. Stocks had an impressive run up during 2016 and 2017 and attracted many new investors. Unfortunately, some of them were unprepared for the 10% correction in February and gave up on investing. The cryptocurrency crash created even more tragedies.
- It…puts you in the right frame of mind. If you just took your entire $100,000 savings out of cash and put it into stocks and immediately lost 10%, you would probably get scared off and leave with a loss too. If you only invest a few thousand each month, then you can look forward to higher returns after a correction. When a bear market comes years later, you’ll have a cushion of gains to protect your investments.
- You can time the market without even trying. Since you invest the same amount each month, you buy more shares when prices are lower. As a result, your average dollar cost is lower than the average price. This is an easy way to follow Warren Buffett’s advice to “be greedy when others are fearful.”
Historically, dollar cost averaging has mostly been used with stocks and mutual funds. However, it can also be used with precious metals. Gold has often been too expensive, but silver coins have always been affordable enough for dollar cost averaging.
Conclusion
In today’s uncertain investment environment, diversification is more important than ever.
- Keeping everything in the money market has always been a poor long-term investment strategy, and rising interest rates do not change that fact.
- On the other hand, 2018’s high stock valuations and volatile markets make big commitments exceptionally dangerous.
Many investors would like another way to diversify [and] dollar cost averaging allows you to diversify over time so that you can begin building a richer retirement regardless of what the markets do next month.
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Life is like going the wrong way on a moving escalator. Walk and you stay put. Stand still and you go backwards. To get ahead, you have to hustle or, at least, your money has to hustle. You have to make your money make you money and dollar cost averaging as an investment strategy is like steroids for your money. The difference between doing it and not doing it is millions of dollars.
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