Dollar-cost averaging is a simple strategy that financial advisors use to alleviate market timing and reduce the average cost per share if the share price declines. The investment technique involves purchasing securities, especially stocks, mutual funds, and index funds, at regular intervals without regard to price changes.
An Emotionless, Ongoing Approach
Dollar-cost averaging implements automatically over time so that it is not contingent upon the influence of emotions, particularly from fear and greed, that might lead investors to sell or buy at deceptively opportune times. Making investments periodically, instead of in lump sums, lowers the initial investment without attempting to time the market.
Those who implement dollar-cost averaging ease into the stock market over time by investing the same dollar amount every month or periodically, and the number of shares that the periodic amount buys will change over time. The amount will buy more shares when the share price is lower and buy less when the share price is higher.
If the share price goes down, then after regular investing, the ending number of shares owned after some time would be greater than if all the money had been invested on day one, and the average cost per share would be lower. The opposite would be unfortunately true if the share price went up. Therefore, dollar-cost averaging minimizes investment risk in a volatile market.
Dollar-Cost Averaging for Retirement
Many retirement plans permit employees to make contributions periodically. Dollar-cost averaging is a sound approach to investing. To get started, contact the Tulsa financial planners at First State Investment Advisors today at (918) 492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.