For a new or even an experience investor, who would like to invest to maximize income, compound wealth and beat the cost of inflation, the best option is to approach investing immediately. For most investors who want to invest in the stock market to get higher returns, than for instance their average savings account, the best way to approach investing especially for beginner, is by initiating Dollar Cost Averaging Strategy.
While it may be in the best interest for beginners to start investing immediately, however, before starting investing you should first:
- Pay all your loans, particularly high-interest debt. Paying your debts, allow you to avoid losing money by paying interests
- Build an emergency fund in easily accessible account. You need to ensure you could survive financially if you lost your job or if an unexpected situation were to appear.
As soon as you achieve your gaol of paying high-interest debt and building your emergency fund, then you should begin the dollar cost averaging investment.
Dollar Cost Averaging
The dollar cost averaging is a strategy to manage price risk when investing in funds, exchange-traded funds ETFs, stocks or cryptocurrencies. Instead of investing in a particular security at one time with one single purchase price, with dollar cost averaging you divide up the amount of money you would like to invest and buy small quantities over time.
Most of investors are aware that the price of assets, such as funds, exchange-traded funds ETFs, stocks or cryptocurrencies, are volatile. By initiating the dollar cost averaging, you are dividing up your purchase and make multiple buys, and therefore maximize your chances of paying a lower average price over time.
Benefits Of Dollar Cost Averaging
Investors can realize the benefits of dollar cost averaging over the long term. Because, asset prices tend to rise in the long term. Generally, asset prices do not rise consistently over the short term. Instead, they run to short-term highs and lows that may not follow any predictable pattern.
Therefore, many investors have unsuccessfully attempted to time the market and buy assets when their prices appear to be low. Because, in reality, it’s almost impossible, even for professional stock advisor, to determine how the market will move over the short term. Today’s low could be a relatively high price next week. And this week’s high might look like a fairly low price a month from now.
In the meantime, when you wait and attempt to time asset purchase, you frequently end up buying at a price that increases, after the asset has already made big gains.
As research proved that, investors who tried to time the market saw drastically less gains than those who regularly invested with dollar cost averaging. The dollar cost averaging has benefits of:
- Decreases the risk that might pay too much before market prices drop.
- Dollar cost averaging helps investors begin investing with small amounts of money.
- Helps investors compound wealth
- Get your money to work on a consistent basis, which is a key factor for long-term investment growth.
- Investors don’t have to wait until they have a larger amount saved up to invest.
- Dollar cost averaging’s regular investments also ensure you invest even when the market is down.
What Is The Effectiveness Of Dollar Cost Averaging
Many researchers have found that over the long term, dollar cost averaging underperform lump sum investing. Therefore, if you have a large sum of money, you’re generally better off investing it as soon as possible, particularly when the price of assets are low.
But it also true that investors who used dollar cost averaging did in fact build up significant investment and growth for long term, but slightly less most of the time than if they had invested a lump sum at once.
It is true that lump sum investing beat dollar cost averaging most of the time, particularly when the market is down. A third of the time, dollar cost averaging outperformed lump sum investing. Because it’s impossible to predict future market drops, therefore dollar cost averaging offers solid returns while reducing the investment risk.
However, the dollar cost averaging investment strategy can be affective for investor who:
- May not have a large amount of money saved for investment.
- Feel that waiting to save money for investment may cause them to miss out on potential investment opportunity.
- Large sum investment can be stressful for them, especially when invest a lot of money at once, and
- It may be easier psychologically for them to invest portions of a large sum over time.
Who Should Use Dollar Cost Averaging
You might consider dollar cost averaging if you are:
- Inexperience investor or a beginner
- Only have smaller amounts to invest in fund, ETFs, stocks or cryptocurrencies.
- Not interested in all the research that goes along with market timing.
- Discouraged to keep investing in down markets.
To learn more about the investment, you can purchase THE FIRST INVESTOR book and receive a discount by clicking on The First Investor