How Dollar-Cost Averaging Takes The Guesswork Out Of Investing – Forbes
Dollar-cost averaging (DCA)
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As you might guess, one of the most common investment questions we receive on our Financial Coaching Line is about when to buy and when to sell investments to maximize returns. My most common answer to that question is that if I knew precisely when to buy securities at the perfect price with perfect consistency, I would be answering that question from my private island. In all seriousness, the up and down nature of investing often causes investors to hit pause on executing their long-term investment plans, which can cause serious harm to their long-term results. Investment paralysis can cause you to miss out on the best returns in the market. If you are looking to buy and hold for the long run, there is a method of purchasing shares that can help you ride out the ups and downs of the market and potentially improve your returns over time: dollar-cost averaging.
Dollar-cost averaging is easy to implement
The beauty of dollar-cost averaging is its simplicity. All you do is invest the same amount of money in your desired investment on a consistent basis over time (say every two weeks or each month aka when you get paid). When the share price is high, the number of shares you will get for your investment dollars will be lower and when the share price goes down, you’ll get more shares for your money. You might already be using dollar-cost averaging. If you participate in your employer’s 401(k) or other retirement plan, the same amount of money is deducted from each paycheck and then invested per your selections.
Dollar-cost averaging works
Because the stock market goes through many ups and downs over time, the odds of you being able to predict or pinpoint the lows with any consistency are extremely slim. This makes it unlikely that waiting and then investing all your money at once will pay off over the long-term. But those fluctuations create the perfect conditions for dollar-cost averaging to work its magic.
An example of dollar-cost averaging leading to higher returns
Let’s say you’ve set up a program of investing $100 a month in an exchange-traded fund. The fund share price generally hovers around $10 so you typically get about 10 shares for your monthly investment. But one month the market experiences a downturn, and the share price drops to $5. Your $100 investment buys you 20 shares.
You now own more shares that will be worth more when the market returns to its usual level. In this example, …….