The Benefits of Dollar-Cost Averaging

There are many investment strategies that will help you gain the maximum profit for the lowest level of risk. One such strategy is the dollar-cost averaging. In this article, we’re going to dig into what dollar-cost averaging is and its advantages. 

What is Dollar-Cost Averaging? 

Dollar-cost averaging refers to the strategy of investing a consistent dollar amount in the same investment over a period of time. 

It has many advantages. For one, it lets the investor smooth out the peaks and valleys of his investments. 

Since he is investing the same amount of money to the stock regardless of the changes in its price, the investor: 

  • Buys more shares of the stock when the price is declining; and
  • Buys fewer shares of the stock when the price is going up. 

Apart from the, the following are some of the biggest advantages of using dollar-cost averaging. 

Eliminates Emotional Investing 

One good benefit of dollar-cost investing is that when you use it, you take the emotion factor out of your decision-making process.

You will continue on a predetermined course of buying a certain dollar amount of your preferred investment regardless of how wildly the price swings. 

This way, you will not be fearful enough to bail out of the investment when the price declines in a wild swing. 

Instead, you will see that wild swing as an opportunity to acquire more shares at a cheaper price. 

Bad Market Timing 

Timing is important when it comes to investing. Before you invest, make sure that you check the overall condition and trajectory of the broader market. 

There is always a risk that you may be investing your money just before a downturn. And when you’re unlucky enough to actually experience that, you will end up losing all of your investment money. 

With dollar-cost averaging, you will not be timing the market. Instead, you’re following a steady path of investment which lets you build up a position when prices are low—which means you can get a nice, handsome payback when the market rises up again. 

And, indeed, it rises over time. 

The Market Rises Over Time 

This can be a disadvantage depending on who is looking. For some investors, investing a lump sum of money early will provide better results when the market goes up. The lump sum will provide better returns over the longer run since the market tends to rise up eventually. 

Picking Good Investments 

Those things being said, dollar-cost averaging doesn’t solve all investment problems. It is not a substitute for research and identifying good investments, even though the dollar-cost averaging strategy is a passive investment style. 

For instance, if the asset you selected turns out to be a bad one, you will still be steadily losing your money. 

At the same time, when you use a passive approach, you will not be responding to the changing environment. 

And when you are not aware or responding to the changing environment, you may miss out on the important changes that might make you rethink the way you are investing. 

At ProfitStar we strive to bring the best out of our students, guiding them through the complex world of financial markets.

 

Leave a Reply

Your email address will not be published. Required fields are marked *