The objective of Dollar Cost Averaging is to invest a set amount of money at regular intervals so the average cost of shares tends to even out the market's peaks and troughs. Your dollars purchase fewer shares when the market is up and they buy more when it's down.
You will not achieve the positive results of buying at the market's low point and selling at its high point, neither will you suffer the consequences of doing the opposite. In a generally rising market, you have the opportunity to accumulate wealth over time in a systematic, organized way.
In the long run, it doesn't matter when you start, just that you start. Over a period of years, it makes little difference whether the market was up or down when you began. The market has averaged almost 10% growth since 1929, even when you include the sustained decline of 2000.
Making monthly additions to your account allows you three times as many opportunities to benefit from favorable market swings as investing on a quarterly basis. It also provides you with three times as many chances to buy in a decreasing market. The more frequently you invest and the longer you keep investing, the smoother the average-share-cost line becomes.
A market decline can mean bargain prices. Unless you are selling shares, a fund's price quote in the daily paper is not relevant, so don't panic if it is down. In fact, a downturn provides the opportunity to buy more shares at attractive prices—shares that have the potential to grow in value when the market returns to an upward growth pattern. Remember that in order for dollar-cost averaging to work, you must be prepared to commit the financial resources and have the resolve to make the contributions on each appointed date.
The advantage of dollar cost averaging is since you don’t know what the markets will do in the future, you protect your assets by buying into the market gradually. at regular intervals. Regular investing does not ensure a profit and does not protect against loss in declining markets.
Investors should consider their ability to invest continuously during periods of fluctuating price levels and their tolerance for risk before deciding on an investment strategy. A talk with their financial advisor can help them understand their risk tolerance.
Roger Sorensen
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