Dollar Cost Averaging Benefits
Dollar cost averaging represents a good tool over the long term, which enables the elimination of emotions out of stock investment decision making.
Deciding on the right price at which to purchase a stock represents one of the major difficulties that investors face. Whether the time has come to purchase a particular stock can be sometimes further complicated due to many factors.
Finding a stock that has reached a low price, which is about to rise is one of the main objectives of most investors. Once they have found the golden egg the time has come to jump with both legs and purchase the stock. However, few succeed in establishing that this time has come in a consistent fashion.
Additionally, many investors fail to recognize that the stock is about to rise and as a result lose some of their potential gain. Often referred to as market timing, this activity may lead to losses, since it hides many dangers.
In order to avoid establishing an entry point you can use dollar cost averaging.
Dollar cost averaging requires you to make small, but regular investments. The time at which you will make these investments is up to you, though it is recommended to make it when you receive your salary or once per month. You should disregard the current condition of the market.
Retirement plans, such as 401k or 403b, include dollar cost averaging, because you automatically make contributions every month. Your employer pulls a predetermined amount of money each month and thus contributes to the construction of your retirement fund. Another benefit is that the amount that you contribute to the retirement plan is before taxes are charged and are invested in different investment solutions, such as mutual funds or others.
Dollar cost averaging is not limited simply to retirement plans. You can apply it to your investment program. What makes dollar cost averaging so attractive is that you purchase more stocks when the prices are low and few shares if the prices are above what you consider reasonable. Dollar cost average is considered a better investment strategy than market timing since it provides an average cost.
The Key to the Success of Dollar Cost Averaging
Many investors are lured into timing the market. Using the dollar cost averaging strategy eliminates emotions out of the investing decision making. This greatly increases the popularity and success potential of the strategy.
Additionally, when you use dollar cost averaging you set an amount of money that you are willing and able to invest over the time. The rest is left to the market. You don't have to think about the right time to invest in a stock since you make regular investments.
So, you are facilitated in your investing since you don't have to guess the right price at which to purchase a stock.
However, you should keep in mind that dollar cost averaging doesn't guarantee you that you will make a profit. Generally, there is no investing strategy that 100% can guarantee you the making of profit.
All you have to do is to implement the strategy upon quality investments and apply the required discipline over a long period of time. In this way you greatly increase your chances for success.
Finally, a type of a buy and hold strategy, dollar cost averaging provides investors with the opportunity of making regular investments by taking emotions out of the picture. It also eliminates the need to make guesses on the right time to purchase a stock, since the market does this for you.
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