No matter what your goal is for the money you invest, you can get there faster by continuing to add to your portfolio on a regular basis. Especially when the stock market recently dropped.
Points To Know About Dollar Cost Averaging
Avoid mistiming the market
Take emotion out of investing
Think longer-term
Ensure you won't miss a contribution
Dollar-cost averaging can be especially powerful in a bear market, allowing you to “buy the dips,” or purchase stock at low points when most investors are too afraid to buy. Committing to this strategy means that you will be investing when the market or a stock is down, and that’s when investors score the best deals.
Once you decide to regularly invest smaller sums of money, it's important to make a commitment to a specific plan. If you just figure you'll invest whatever you have left at the end of each month, you'll probably find that "whatever" often translates to "nothing."
Then, the best way to make sure you follow through on your commitment is to move the money out of your bank account before you ever get a chance to spend it. Automatic contributions equals simplifying your finances.
Not only is setting up automatic investments a way to simplify your life, it's just smart investment behavior in general. It removes the pressure to decide when to make each investment—sidestepping the possibility that you will be too indecisive to make any move at all.
Dollar cost averaging means shares you own will have a variety of purchase prices because you bought them at different times. Why is this a good thing? When shares are more expensive, you'll buy fewer of them. When they're cheaper, you'll buy more of them. Overall, this will push down the average cost of your shares.
Making multiple purchases at different share prices could also be a benefit at tax time. If you own some shares that are below the price you bought them for, those specific shares may be sold at a loss in order to offset other sales where you had taxable gains. This only applies if the investments are in non-retirement accounts.
Christopher Peterson is a Certified Financial Planner™ professional, NAPFA member, fee-only financial advisor and provides fiduciary advice to his clients. Peterson Wealth Advisory was established in 2008.