What is Dollar Cost Averaging? Why Should You Consider It?
What is Dollar Cost Averaging? You might have heard the term or possibly have not. Whichever side you are on, i’ll say this; it is okay. To a significant part of the investing community, it would be more appropriate to wait for the perfect time to invest. While it could be a great and potent move, it is one rife with more odds than possibilities. As such, dollar cost averaging (DCA) aims at allowing investors to invest in regular amounts regardless of prevailing market conditions. DCA gives investors more chances for positive market returns without having to worry about perfect market timing or amassing a lump sum to invest. Below is dollar cost averaging at a greater detail.
No need to time the market
There is no need to time the market as different markets always present opportunities.
Regular committed investments
An investor is expected to put a commitment for a regular amount that he or she will invest in the markets periodically. This can be monthly or quarterly.
Ability to invest in both good and bad markets
Good markets will be high priced holding great returns for people holding buy positions in the market. Conversely, such markets make it pricy for new investors as they are only able to buy a limited amount of shares.
On the contrary, bad markets which are mostly in sell momentum, offer great opportunities for buying more shares at a lesser cost. This can be summarized as, when the markets are not doing well dollar cost averaging allows you to buy more. Markets that are underpriced offer a discount to keen investors. Such opportunities ought to be seized. Dollar cost averaging makes its possible by allowing for regular investing at manageable amounts.
Room for irregular amounts
The amounts can be irregular but it is always good to have a minimum that you cannot go beyond. This goes into a baseline into your investing that can allow to easily make future projections of your portfolio. You can have a standing order in your checking account that allows for automated periodic commitments to your broker.
Risk tolerance for risk averse investors
For risk averse investors, dollar cost average allows for careful allocation of capital in bits.
Dollar cost averaging acts in the best interest of an investor’s emotions. It shields an investor from worrying about their lump sum capital getting squeezed in a market. In fact, it boosts investor confidence and morale especially in bad markets that offer discounted buy opportunities. Further, an investor is able to buy into a falling market for calculated amounts that significantly minimize the downside risk in his or her portfolio.
Simple, for everyone
It is a simple method for investing and anyone can start with little to no guidance. Check out Scope Markets and get a brief on their stock market options.
Last but not least, dollar cost averaging effectively accommodates the rebalancing of portfolios. Rebalancing is the selling of non performing stocks to reallocate the capital to promising stocks. Dollar cost averaging provides more capital to bolster such moves.
Conclusively, you do not need to wait for a lump sum to start investing especially on markets that have proven to beat inflation over years, an index fund would be ideal. Start Dollar Cost Averaging today. You can actually Do it Yourself.
Do seek guidance from your financial advisor if you need more clarification.
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