Is dollar cost averaging really all it’s cracked up to be?
If you have been looking to make an investment, you may have come across the idea of dollar cost averaging. But it’s hard to know if this is a good idea unless you really understand the concept.
In this article, we will take you through the idea behind dollar cost averaging and point out the main benefits and uses of this investment technique. So, let’s jump straight in and prepare ourselves to invest!
What Is Dollar Cost Averaging?
Dollar cost averaging is a basic investment technique in which you invest an even amount of money in an asset over time, without worrying about its market price.
For example, you might decide to invest in a commodity over the course of a year. What you would do is decide your total investment amount and then divide it evenly across different intervals.
To make things simple, we will say that the total investment amount is $12,000 over the course of a year. To use the method, you would invest $1,000 each month for one year to make your total investment.
The main idea behind this investment is to not be affected by changes in the value of the dollar over time. Effectively, you are averaging the dollar price over a given period.
The reason you want to do this is that the dollar cost can be quite volatile because of various changes to the overall market.
Is It a Good Idea?
Dollar cost average has been favored by many investors who see it as a conservative way of benefitting from overall market growth, without trying to make complex predictions of peaks and troughs in market value.
For this reason, you are unlikely to make any massive windfall from your investment. It is not the same, for example, as the idea of day trading. This method seeks to make short-term gains on the volatility of the market during very short periods of time.
Using the dollar cost average method has a much longer-term outlook.
This means it is a very valuable investment technique if you are not prepared to risk your savings being quickly depleted.
This is why it is used in many 401(k) plans for retirement investment. You do not want to risk your retirement savings on the volatility of the stock market, but you also want to see it generally appreciate.
For this kind of investment, dollar cost averaging is perfect.
Investment Is a Personal Matter
Before you make any kind of investment, you need to be sure that what you are doing is right for your personal situation. A lot of us can be fooled into thinking that it is easy to make money on the stock market.
But the truth is that it is not easy to make large, quick gains on investments. If you cannot afford to lose the value of your investment, you shouldn’t listen to the advice of get-rich-quick investment schemes.
Dollar cost averaging is a much more secure and trusted method of making your money grows over a long period of time.
If you’ve found this information useful, why not check out some of our other great articles on investments?