If you’ve been burned before by buying high and selling low, you may want to consider putting your investments on cruise control with dollar-cost averaging.
Dollar-cost averaging – the basic premise behind employer-sponsored savings plans like 401(k)s – is the practice of investing a set amount each month in a particular investment vehicle. As the share price of your investment fluctuates, so will the number of shares your set amount buys. Sometimes you’ll pay more and sometimes the stock or mutual fund will decrease in value, allowing you to purchase additional shares..
Americans set a record in 2004 for investing in IRAs and employer-sponsored savings plans, indicating a renewed interest in this old technique. With the vast and varied information available on investing, many Americans have chosen to stop chasing yesterday’s high returns. Using dollar-cost averaging helps them ride out the ups and downs of the market.
Dollar cost averaging involves continuous investment in securities, regardless of fluctuating price levels. Investors should consider their ability to continue purchases through periods of low price levels r chancing economic conditions. Dollar cost average does not assure a profit and does not protect against a loss in a declining market.
Dollar-cost averaging isn’t for everyone. Short-term investors and those concerned about market volatility won’t benefit from the slow and steady pace of dollar-cost averaging. Always meet with a financial professional before investing. For those who want to invest a consistent amount each month and potentially lessen the effects of market volatility, it might be an option.