Smart investors know that trying to time the market is often futile. Instead, you plan ahead and invest in such a way as to minimize risk and maximize your returns. Whether you are a seasoned investor or just getting started, dollar-cost averaging could be beneficial.
What is dollar-cost averaging?
Dollar-cost averaging entails investing a set amount of money into an investment portfolio over regular intervals. Rather than investing a large sum of money at once, dollar-cost averaging makes investments on a regular interval over time. If you are saving money into a company-sponsored 401(k) or 403(b), you are already making use of dollar-cost averaging.
There are a number of benefits to this approach. Specifically, dollar-cost averaging can help you:
- Buy more shares: Over the long term, the price of assets tends to move higher. By dollar-cost averaging, you will purchase more shares when markets are down and fewer shares when markets are high.
- Invest consistently: Dollar-cost averaging maintains consistency as investments are systematic.
- Set it and forget it: Rather than trying to time the market in the short term, dollar-cost averaging invests on a regular schedule. This ensures investment decisions are not swayed by emotion and allows you to allocate time elsewhere. This is an especially useful strategy if the idea of monitoring the stock market makes you queasy.
A case for lump-sum investing
There is research that shows that over the long term, lump sum investing can outperform dollar-cost averaging. If you get a bonus or a sudden inheritance, you are generally better off investing it as soon as possible. While returns are not guaranteed, markets have historically risen over most periods of time meaning that the highest returns are earned simply by being fully invested.
Who Should Use Dollar-Cost Averaging?
Dollar-cost averaging is a strategy that can best help new investors, or those without much money to invest at the outset. If you are investing for the long term, dollar-cost averaging is a safer way to get started investing as you spread out your purchases over time. However, if you have a lump sum to invest, you may want to pursue another investing strategy.1,2
If you have questions about your investment strategy or how to invest a lump sum contact us.
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