One of the easiest and best plans for investing is to take advantage of dollar cost averaging. This type of investment strategy is very easy to use, and it is systematic. Analysts agree that it is one of the best investment strategies when one wants to build assets over the long term. And, if you have a retirement account, you likely already take advantage of dollar cost averaging.
What is dollar cost averaging?
Dollar cost averaging is an investment strategy that involves putting the same amount into an investment account. Your money buys shares — as many as can be afforded with the amount of money you put in. Most dollar cost averaging plans allow you to buy partial shares. So, if you have $200 invested every month, and the mutual fund or company you choose has shares that cost $35 apiece, your $200 will get you 5.7 shares each month. But share prices don’t stay the same, do they?
How dollar cost averaging helps your investment portfolio
One of the greatest advantages of dollar cost averaging is the fact that you do not have to keep watching the prices. Your automatic investment just buys as many shares as it can. If the price drops to $25 per share, your $200 now buys 8 shares instead of 5.7. On the flip side, if the price goes up to $50 per share, you only get 4 shares that month. But you are always purchasing shares, and always adding to your investment portfolio. As long as the investment trends generally upward, the little dips in price will serve to help you in the long run, as you will own more shares.
How dollar cost averaging helps you become a better investor
One of the keys to successful investment is a consistent level. Especially for the novice investor, a regular way to invest is important. Using dollar cost averaging, it is possible to use a “set it and forget it” mentality. Having the investment amount automatically deducted from your paycheck (for a retirement account) or automatically withdrawn from your bank account (for other types of investment account) can help you continue to invest.
A dollar cost averaging plan can be a great way to get started in investing. As always, though, it is important to check your investments every year to make sure they fit your needs. And as you become a more experienced investor, you can start looking at other investment strategies to help you make even more money. But a dollar cost averaging strategy should remain part of your investment portfolio building, even if it is used only for one or two investment accounts.