For beginning investors, and for those who do not have a lot of capital to play with, dollar cost averaging is the way to go. I don’t know about you, but I don’t have $10,000 (or even $3,000 for that matter) to simply dump into a stock and hope that I don’t take a loss. I have about $300 a month to play with in real investing money (not counting my monthly contributions to an online savings account), and $100 of that is going into my retirement plan. So, with my meager $200 I can invest in various stocks (divided up to offer diversification). How do I do it? And how is my portfolio actually doing?
Dollar cost averaging. And doing fairly well. At least I’m ahead.
What is dollar cost averaging?
Dollar cost averaging is a fabulous investment strategy that allows regular folks to make money in the stock market. It is a long-term investment strategy that requires patiences and committment. But it is easy to learn, and as long as you periodically review your choices and choose investments that are fundamentally sound, you should do pretty well for yourself. Here’s how it works:
Instead of taking a large lump sum and putting it into the stock, you work your way into a position by buying up smaller amounts of stock. This can be one or two shares at a time, or even partial shares. This means that the cost is spread out, but you are still building up your stock shares. There are plenty of online brokers that offer dollar cost averaging options in which you can automatically invest a certain amount of money each month. I divide my $200 among two different index funds and three different mutual funds in different sectors with the help of an online trading company. Each month a little bit goes to buy as much of the stock as I can afford.
Advantages of dollar cost averaging
The advantages of dollar cost averaging are many. First of all, it allows you to start investing, even if you do not have a great deal of money. You can usually start with as little as $50 a month. The idea, of course, is to invest more as your financial situation improves. And, for the most part, investing is important to your financial planning. Secondly, you are protected from major price fluctuations. Because you are only buying a little bit at a time, major changes downward are not as devastating (of course the flip side is that big changes upward are not as profitable). Thirdly, an automatic investment strategy helps you maintain consistency, and that is the hallmark of solid personal finances.
Dollar cost averaging is an investment strategy for the long haul. It works best if you plan to keep with it for five to ten years. You would be surprised at how much money you can accumulate when you get started with a dollar cost averaging investment strategy.
Disclaimer: Investing is a risk. There is always the possibility that you will lose money when you invest, no matter how insulated the risk might be.