It’s no secret that saving for retirement can be a difficult task. Many people find it challenging to set aside money each month, let alone a lump sum investment made all at once. This is where dollar-cost averaging comes in. By investing at regular intervals rather than making large deposits, you can help reduce the financial burden of investing for retirement. In this blog post, we will discuss the benefits of dollar-cost averaging and how you can get started today!
What Is Dollar-Cost Averaging?
For people with some kind of a workplace retirement plan, it should be easier to understand the concept of dollar-cost averaging since they are already using this formula in some way by default for part of their investments.
Dollar-cost averaging is a risk management strategy for prices when one is buying stocks, mutual funds, or EFTs (exchange-traded funds). Instead of investing a one-time lump sum for purchasing single security, dollar cost averaging allows you to divide your investments into smaller amounts to purchase small quantities of stock over an extended period of time.
Suppose you have $1000. With a lump-sum investment in the stocks, you will buy a security by paying the thousand dollars all at once. Dollar-cost averaging on the other hand would allow you to invest $100 each month over a period of ten months to purchase the same. A regular investment of this kind helps you in several ways discussed later in the article in detail.
Of course, prices may not always see a drop but by purchasing smaller units over time and making multiple purchases, you increase the likelihood of paying a smaller average price for the goods. This is key for long-term investors who wish to invest on a consistent basis.
Is Dollar-Cost Averaging a Smart Idea?
Studies on stock market trends have shown that in the long term prices eventually follow an upwards curve even if it suffers short-term dips. One of the biggest benefits of dollar-cost averaging is that it skews your chances of profitability in a positive direction in the long run.
These short-term highs and lows may not follow any predictable pattern. What this means is that even for the most experienced stock market analysts, the predictions are at best a result of their guesswork. While it may be possible to prepare oneself in advance for sudden dips in the market, in reality, it is almost impossible to accurately time the market this way. It is completely possible for stocks suffering a dip in prices one week to become relatively expensive the following week and vice versa.
Only in hindsight is it possible to determine, with accuracy, the favourable prices for any given stock. But it’s too late by then, and waiting on the sidelines will not do much for your investments other than making you purchase stocks that have already become pricier than before. Not only this, but for investors who are relatively inexperienced in the matters of timing the market and predicting the stock price each time, it is entirely possible to suffer from exorbitant costs.
In a study by Charles Schwab, investors who bought stocks after timing markets have shown a proclivity of meeting drastically fewer gains than those who practiced investing on a consistent basis in smaller amounts.
Benefits of Dollar-Cost Averaging
Here are the various ways dollar-cost averaging helps investors make better purchasing decisions.
Dollar-Cost Averaging Helps Those with Less to Invest
This method is especially beneficial for aspiring investors who do not possess large sums to invest in stocks. For people who cannot invest a hefty amount all at once, dollar cost averaging is a holy grail leading small investors to the doors of market growth. You no longer have to miss out on opportunities because you do not have enough money saved up and can get your foot in at the right time.
Ensures Investment on a Consistent Basis
With dollar-cost averaging, you ensure making investments even during times when the market is experiencing short-term dips. For a lot of people, the market downturn is intimidating, and investing during this time can be emotionally taxing.
Dollar-cost averaging easily takes the emotion out of your investment equation and keeps the balance going. As stated earlier, overcoming this intimidation faced because of short-term dips is important because in the long-term markets almost always follow an upward trend and so you do not miss out on potential growth in the future.
In another research by Charles Schwab, historically, investors who refused to withdraw shares during bear markets (stock markets suffering extreme dips in prices) have seen better returns than those who tried timing the markets.
Dollar-cost averaging ensures a very logic-oriented mechanism of investing so that you keep purchasing small units of assets over time. Eventually, you realize that you have bought greater shares when the prices were low and fewer shares when the prices were relatively higher.
Get the Best of Both Worlds
As a general rule, individual stocks and mutual funds do not typically fluctuate drastically in terms of prices going from one month to another. The real value of the dollar-cost average surfaces as you keep investing persistently. So if you wish to seek the best of both worlds by enjoying the premium prices of a bull market and the discounts of a bear market.
A Long-Term Strategy
The most important thing to bear in mind is that dollar-cost averaging is not for investors who are in search of quick, short-term gains. It requires patience and long-term investing with consistency.
Stock prices will not always be skewed in one direction or another, and the constant flux eventually favours an upward curve in the longer run. This means that stock prices typically see a significant increase over an extended period of time.
Dips sustained by bear markets can rest for almost a year, so short-term investors may not be able to gain much from dollar-cost averaging. This is why dollar-cost averaging is seen as a great long-term investment strategy.
Get Started Today
You can get your foot through the stock market front door with as little as a $100 invested month to month. To get started today, contact one of Advantage Pacific’s experienced and professional advisors at 778-349-8774 or email us at [email protected].