As evident with the recent volatility in the stock market, investing inherently involves some risk – that’s just the way life works. Our job as investors is to figure out ways in which to minimize this risk. One common method that investors use to minimize risk is dollar cost averaging (DCA). Dollar Cost Averaging offers a strategy for investors to gradually increase their stock market exposure for potential long-term upside results, while taking into account the whipsaw nature of current market conditions.
Dollar cost averaging involves investing a fixed amount over a predetermined period of time rather than all at once. The rationale behind dollar cost averaging comes from the idea that markets don’t move in a straight line. By investing the same amount, you end up buying fewer shares when the price is high and more when the price is low. Not only that, but it minimizes risk from big market shifts during the entire investment period. If something should go terribly awry with the company you’re investing in, you can always simply stop purchasing shares and less of your investing capital will be affected.
Another benefit to dollar cost averaging is that is helps overcome decision paralysis. It’s natural to be hesitant before investing a large amount of your hard earned money, even in the bluest of blue-chip stocks. However (and especially for new and inexperienced investors), gradually easing into the market makes it easier to invest. Further, with the recent market volatility, gradually investing over a period of time helps to remove the uncertainty of the timing of your investing, so you are not constantly trying to find the lowest price. A gradual, steady approach enables you to begin and continue the investing process in an effort to reach your long-term goals.
While dollar cost averaging may be the best idea for novice investors, it by no mean guarantees a return on investment. In addition, new research suggests that lump sum investing may pay off in the long run. However, dollar cost averaging is far less nerve-racking and helps many investors sleep more soundly at night.
Investment Account Manager 3 Individual, a Windows based desktop portfolio management software program available to investors since 1985, provides the tools necessary for investors to implement a dollar cost averaging strategy. Tools include the ability to track each unique lot acquired, and reports that list these unique lots with their unit cost paid, as well as the dollar cost average unit price for all lots/quantity acquired. Further, when selling partial shares of the total quantity owned, users can manage tax consequences using several sale methods: First In First Out, Last In Last Out, Specific Identification, Highest Cost, Lowest Cost.
To learn more on Dollar Cost Averaging, visit Investopedia, a popular website for financial education: https://www.investopedia.com/terms/d/dollarcostaveraging.asp
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