Are you a new investor looking for a simple method to get started in stocks or crypto? Dollar-cost averaging may be the exact strategy you are looking for.
Dollar-cost averaging is when you consistently invest the same dollar amount in the same asset over a certain period of time. Regardless of the ups and downs of the market, you will invest the same dollar amount in the same intervals throughout the year.
An example of this would be investing $200 dollars a month into a certain stock you are interested in. The stock could be $10 one month and then $8 the next, but you will invest that same $200 no matter what the price is.
That is dollar-cost averaging.
This strategy reduces your investment risk but also leaves the possibility of missing out on larger gains in the market.
There are both pros and cons with the dollar cost averaging method, so let’s take a deeper look to see if you think this will work out for you.
I’m sure that you have probably heard the saying, “buy low, sell high.” Well, dollar cost averaging pretty much tells you to do the opposite of this.
Most people want to buy the ‘Lows’ of the market, that way when it goes back up they will receive the most return on their investment. The problem with this is that it is nearly impossible to time the market, especially if you are a novice.
Some professionals insist that they can beat the average return on the market by timing it correctly, but the majority of people cannot do this. This strategy tends to backfire and people end up buying and selling at the wrong times.
Dollar-cost averaging prevents you from timing the market by instead investing a fixed amount over a certain period of time. Investing like this pretty much removes all emotion from investing, that way you don’t get upset about the lows and highs in the market.
Investing your hard-earned money comes with a lot of emotions including fear, worry, and anxiousness. Dollar-cost averaging can help relieve these emotions.
Avoids Bad Timing
As mentioned earlier, the market can be unpredictable. If you invest a large sum of money at one time, there is a risk that the market could take a huge dip right after you invest.
Imagine you invested $5,000 right before the market took a downturn of 10%. You would be pissed!
Time in the market is better than timing the market.
Spreading out your investments through dollar cost averaging can help limit your losses and smooth out your timing in the market.
Lump Sum Investing
The market tends to rise over time, so dollar cost averaging could actually be a disadvantage.
This means that investing a large lump sum earlier in time would most likely lead to a better return on investment compared to investing small amounts over a longer period of time.
You may miss out on potential gains if the market goes up at a time while you are dollar cost averaging. However, as mentioned earlier it is very tough to time the market.
Dollar cost averaging requires more transactions. More transactions means more fees.
These transactions can add up quickly, so make sure you do your research on which brokerage you want to use and what types of fees are associated with them.
You don’t want to waste money if you don’t have to.
Identifying Good Investments
Investing can make you a millionaire, especially when you factor in compound interest, but you have to know what you’re investing in.
Dollar-cost averaging can help you relieve some stress from investing, but if you are continuously putting money into a bad asset then you are not going to have fun.
Investing consistently into a losing investment will definitely make you angry and no one wants to be upset.
Along with this, you have to keep up with information and current events that could effect your investment.
If you learn that a company is not doing well, or is making some changes, then you may want to change your exposure to that investment. A passive strategy doesn’t allow you to react to the always-changing environment.
What To Do
Everyone wants to get rich, but you will never see any returns on your money if you never make an investment.
Dollar-cost averaging could be a good strategy for you if you are a novice investor who is looking to get started in the market.
There is a ton of free information out there, so continue to do your research and get started.