The Benefits of Dollar Cost Averaging
With dollar cost averaging, you invest a fixed amount of money in the same investment on a periodic basis. For instance instead of investing $50,000 in a particular investment immediately, you might puchase $2,000 at the beginning of each month for the next 25 months.
You may already be using a dollar cost averaging program without realizing it – participating in a TDA/TSA (403b) or 401k plan, reinvesting dividends in additional shares, or automatically transferring funds from your bank account to an investment account are all forms of dollar cost averaging.
Utilizing this strategy can provide several benefits:
- Dollar cost averaging requires the discipline to invest consistently, regardless of market fluctuations. Thus, it reinforces the habit of regularly setting aside money for investing.
- For many investors, one of the most difficult aspects of implementing an investment strategy is deciding when to invest. Fear of investing at a market high, or waiting for the market low, can keep investors waiting on the sidelines for some indication that now is the right time to invest. With a dollar cost averaging program, you just follow the plan and invest on a periodic basis, without trying to time the market.
- A dollar cost averaging program is by definition a long-term program. Thus, if followed consistently, it helps encourage long-term investing.
- Since you are spreading your investment over a period of time, it prevents you from investing all your money at a market high.
Keep in mind that dollar cost averaging does not ensure a profit or protect against losses in declining markets. Before starting a dollar cost averaging program, you should consider your financial ability to continue purchases through periods of low price levels.
Please call (888-RKERMAN or 914-232-4589) or e-mail (robert@robertkerman.com) if you would like to discuss dollar cost averaging and its role in your investment strategy.
Robert Kerman Financial Services, LLC
….Planning to Meet Your Financial Needs….