Buy low, sell high
With stocks or any investment, success is pretty simple. We want to buy when prices are low and sell when prices are high. However, trying to time the market is extremely difficult, as discussed in The Cost of Trying to Time the Market. Dollar-cost averaging can be a useful tool for a number of reasons listed below.
So what is dollar-cost averaging?
With dollar-cost averaging, a regular investment is typically set up, often on a monthly basis. This regular investment is typically automated to execute according to the instructions regardless of the price of the shares. This results in more shares being purchased with the share price are low than when the share price is high.
Dollar-cost averaging benefits
The largest benefit is really that it keeps investors committed to a disciplined approach to investing regularly. If individuals use the remaining checking account funds to invest each month, there often isn't the money there when it comes time to make the purchase. However, with an automatic approach, regular investing is given the high priority it deserves.
The second important benefit is psychological. Markets are volatile, and some months they are down. Knowing that you're getting more for your money when investing in a down market helps keep investors looking at the potential long-term gains rather than fretting about a down market.
Finally, dollar-cost averaging helps minimize investor regret when the market turns down. Studies prove that losses cause more pain for investors than the associated pleasure of an equal gain. In other words, losses hurt more. We are risk-averse beings.
*Disclosure - Dollar-cost averaging does not eliminate the risk of loss to include principal invested.
Many investors see market pullbacks as an opportunity. If you would like to discuss the current market situation with a fee-only fiduciary advisor, click the link below to set up a complimentary consult.
Disclaimer: Past performance is not a guarantee of future results. Actual returns may be lower. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. Any indices referenced for comparison are unmanaged and cannot be invested into directly. Nothing in this blog should be considered financial, legal, or tax advice or recommendations. Your questions are unique to you and your financial circumstances. You should consult with a financial professional before making a financial decision. See full blog disclaimer.