If you had a choice between buying a laptop on sale or waiting until the sale ended and prices went up, you’d buy it on sale, right? It can be hard for many people to approach investing from the same perspective. When the stock market declines, investors have an opportunity to purchase stocks at discounted prices. However, instead of greeting a market decline with enthusiasm, many investors move their money to cash or low-returning government bonds, waiting for stock prices to rise again before investing. As a result, they’re buying stocks on the way up and paying more than they have to.
That’s where dollar-cost averaging can be an effective way to help remove the fear and emotion that can cloud investment decision-making during periods of increased market volatility. If you’ve ever contributed to a 401(k), you’re already familiar with the concept. Dollar-cost averaging is simply the process of investing a set amount on a regular basis (like per pay period, month, or quarter). It enables you to purchase shares at different prices during different market cycles. During a rising market, you pay more per share; during a declining market you pay less. Over time, the price you pay per share averages out. Best of all, you remain invested and in a position to benefit from the power of compounded earnings over time.
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Dollar-cost averaging does not assure a profit and does not protect against loss in a declining market. Such a plan involves continuous investment in securities regardless of fluctuating price levels of such securities. Investors should consider their financial ability to continue their purchases through periods of low price levels.
Investing is subject to risk and loss of principal. There is no assurance or certainty that any investment strategy will be successful in meeting its objectives.
What Is Dollar-Cost Averaging?
March 08, 2021