Dollar cost averaging is an investment strategy. You can use it to increase profits while reducing risk. In this article, we will go over how it works, how it can benefit you, and how to implement it in your portfolio.
What is Dollar Cost Averaging
The strategy behind dollar cost averaging is straight forward. As the investor, you will make periodic purchases of a specific investment. You will purchase the same total value of the investment at each interval, regardless of the investment’s price.
What Dollar Cost Averaging is Beneficial
The main benefit behind dollar cost averaging is that it helps reduce the risk associated with short term and lump-sum investing. It is a long-term investment strategy. You need to methodically invest through bear and bull markets. Over time, your portfolio will reflect a balance between the high and low prices you paid for the assets.
Investing Using Dollar Cost Averaging
If you have a 401k, you may currently be dollar cost averaging and not even realize it. Most employees select a specific fund in which a portion of their salary is allocated towards each time they are paid. If you are investing yourself, it is still a very simple strategy to implement. To do so you will need to use the same amount of money to purchase the same investment product at consistent intervals.
For example, let us say you have $200 a month you would like to invest. Then you decide you would like to invest in the S&P 500. This means each month you will need to purchase $200 worth of S&P 500 shares. Some months you will end up with more shares, others you will end up with less. But investing this way you can reduce your average cost per share over time. Additionally, by staggering your purchases, you can reduce your risk
Implementing the Strategy
The best way to implement dollar cost averaging is by enlisting the help of an investment advisor. They will be able to devise a plan that will help you to make the most of this strategy for increasing your wealth.
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