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Dollar Cost Averaging

Most people know that dollar-cost averaging (DCA) is an investment technique that involves investing a fixed dollar amount on a regular schedule without regard to the share price. Dollar-cost averaging, in other words, doesn’t care about the old investing axiom – buy low, sell high. Or does it?


Time Based System

By investing a specific dollar amount on a regular basis over a long time period, although investors are not guaranteed they won’t lose money, they are guaranteed to be “in the market” at the right time – every time. That’s because they are never “out of the market.”

The investments can be in a mixed portfolio of mutual funds, exchange-traded funds (ETFs) or individual stocks. Each time money is invested, it buys shares at the current price. As prices decline, the money buys more shares. As prices go up, the fixed amount buys fewer shares.

Safety Over Pot Luck

It’s generally accepted that timing the market is a fool’s errand. For that reason, DCA is a safe strategy that ensures you will be buying when prices are low because you are always buying. If you could time the market, of course, buy the right stocks or mutual funds at their very lowest price and sell them at their highest possible price, you would get a larger return.

The problem is, you can’t see the future. Study after study has shown the value of DCA and the fact it is a safe way to invest. You can mix up the stocks or funds you purchase and try to “game” the system to some extent – many people do that – but at the end of the day, many experts say, the safest way to invest is DCA.

Not Everyone Agrees

The beauty of the stock market and investing in general is that for every person who believes one way of investing (DCA, for example) is the cat’s meow, somebody else thinks it’s the worst idea ever.

DCA says it makes more sense to invest $12,000 at the rate of $1,000 per month than it does to invest the whole amount in one fell swoop. Some experts disagree saying you should invest the entire $12,000 at once.

Another Approach

Several analyses suggest you can make more money investing in stocks all at once. That’s because historically stocks have had more up years than down, and they have usually outperformed cash during those up years. (Remember, investing your $12,000 at the rate of $1,000 a month means in month one you have a $1,000 investment and $11,000 in cash lying around. With few exceptions, cash has no return. Chances are stocks will grow.

Naturally, you would be taking a chance – especially if you did zero research or threw a dart at a NASDAQ chart – and could end up losing money by investing all at once. The primary solution to that problem is to conduct research to increase your chances of buying shares that are more likely to grow over the next year.


What About Balance?

An even better approach might be to put the $12,000 into a balanced portfolio of stocks and bonds to even more effectively manage risk. At this point your goal is to go from the portfolio you have to the portfolio you want – based on research.

You could follow a DCA approach, moving a little bit each month from one side to the other. Or you could move it all at once, again based on research. The advantage of the “all at once” system is that it allows you to manage risk in a way that is to your liking. Using DCA, you will take a full year to get there and during that time, you will be in and out of your risk tolerance range.

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