You can’t predict the perfect moment to buy or sell stock. Even the most seasoned, experienced financial experts, analysts, traders, and brokers cannot claim to get their timing right every time. But there is an effective long-term strategy that can help you weather market turbulence.
“The ‘dollar’ in ‘dollar cost averaging’ can be any currency, but the fundamentals are the same,” explains Richard Cayne of Meyer International in Bangkok Thailand. “It’s a little like putting your investing in cruise control. This way, you hopefully won’t fret every time the market moves.”
Dollar cost averaging is investing in intervals
Dollar cost averaging (DCA) helps investors focus less on stock prices. Investors, instead, look forward to a disciplined schedule of putting money into their portfolios. With DCA, investors plan on buying securities (stocks, bonds, funds, etc.) for a set amount over a set interval. For example, you may plan on investing $8,000 in a Russell 2000 index fund by buying units worth $1,000 every month for eight months.
The fund may fluctuate in value over those months. So, by spending $1,000 every month, you are spreading the risk of losing, as well as gaining, value across that period. If you had invested the $8,000 all at once, you’d score big if that price was at a record low. But think about the opposite scenario. DCA allows you to defray some of that concern, while keeping you active in the market longer. Regardless, there is never any guarantee that you’ll make money, whatever the strategy. But with dollar cost averaging, you can mitigate the amount you lose (if you lose at all).
In this particular scenario, you’d make money:
You may still want help deploying a DCA investment strategy
If you’re contributing into a retirement plan, you’re basically already investing through dollar cost averaging. As an individual investor, you may want to do a little more research into what you want to invest in before setting a DCA strategy in motion. Remember, this is just a way to help you stay in the markets to maintain a time in market mentality, which is especially important during turbulent times when the urge is to sells.
So, the longer you commit, the better chance you have to make money. But how often should you buy over that period? Daily? Monthly? Annually? Well, what kind of fees will you face? This may be a good time to consult with a trusted financial expert. Not only can talking to someone like Richard Cayne help you work out what you want to do, but you can evaluate your portfolio and assess your risk appetite as you plan out your financial future.