Dollar Cost Averaging
When it comes to the stock market, time is more important than timing. Because the market is unpredictable, investing is a challenge for even the most informed investors. That’s why investing on a regular basis over a period of time may be better than trying to pick the right time to jump into the market.
This process is called dollar cost averaging, and it may help you overcome the uncertainties of the market by investing more strategically.
How dollar cost averaging works
When you invest the same amount regularly, you end up buying fewer units when the market is up and more units when the market is down. This may cut your average cost per share because you're buying fewer units at a higher price and more units at a lower price.
Here's an example of how dollar cost averaging might work over a four month period:
|Month||Amount invested||Cost per share||Number of shares purchased|
|Average cost per share:||$19.05||21|
The advantages of dollar cost averaging
With dollar cost averaging you tend to worry less about market fluctuations and whether you chose the right time to invest. Using a dollar cost averaging strategy throughout your period of investing, you may be able to reduce the effects of volatility in your portfolio.
Another advantage is that you end up buying more units when prices are lower. A dollar cost averaging strategy involves continuous investment, regardless of the investment’s fluctuating prices. And, if you’re already enrolled and investing for your retirement, you’re automatically taking advantage of dollar cost averaging.
Things to keep in mind
Although dollar cost averaging can be a good method for long-term investing without having to navigate market fluctuations, you aren't guaranteed a profit or protected from loss in a declining market. Dollar cost averaging helps you avoid investing too much when the market is high and too little when the market is low.
Get the help you need
Talk with one of our Retirement Specialists for more information about how dollar cost averaging works for you.