Concept Of Dollar Cost Averaging
Another widely followed technique to make stock investing a strategical task is dollar cost averaging. Dollar cost averaging means making periodic investments of the same amount of money in the same stock regardless whether the price is declining or ascending. The same dollar amount of investment will be made in the same security on the 15th of every month, or on the first day of every quarter or whatever interval is selected. The investment must be devoid of any consideration of the current stock price, if the investor wishes to maintain a program of dollar cost averaging. The idea behind this investing strategy is that by investing the same amount each month over a period of years, you buy more shares at market lows and fewer shares at market highs. As time goes by, the cost of stock shares you add to your portfolio balance out to an average price. This cuts down on the risk that you invest a lump sum at market highs and helps you to continue buying at market lows when others are selling and missing out on potential future gains.
This type of investing strategy has several key advantages. First, it prevents procrastination. Some investors have a hard time getting started. They may know they should be investing, but they never manage to get into the stock market. Once started, dollar-cost averaging can be an easy way to commit to regular investing. Second, dollar-cost averaging helps you participate in the stock market regardless of current conditions. Thirdly, this investing strategy minimizes remorse associated with getting in or out of the market at the wrong time. Even the most experienced investor probably feels a tinge of regret when an investment proves to be ill timed. Worse, such regret may cause you to disrupt your investing strategy in an attempt to make up for your setback. Dollar-cost averaging can minimize this regret because you make multiple previously scheduled investments, with none of them being particularly large.
Dollar cost averaging does not assure a profit and does not protect against loss in declining stock markets. This type of plan involves continuous investment in securities regardless of fluctuating price levels, so investors should consider their financial ability to continue their purchases through periods of both high and low price levels. Historically, dollar-cost averaging over the long term has been a wise, low-cost and potentially profitable way to invest.
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