|Profiting from Dollar Cost Averaging|
With all of the stock market charts and financial analysis tools, it is nearly impossible for any investor to consistently and accurately determine the “ideal” price point of a stock. Investors seeking the tops or bottom of a stock’s price are typically off the mark.
With dollar cost averaging, the risk of purchasing a stock at the “wrong” price is mitigated. Dollar cost averaging is a type of investment strategy that is used to reduce the amount of market risk an investor faces. The amount of risk is reduced by making systematic purchases of an investment, typically mutual funds or shares in a specific company over an extended period of time. This not only eliminates the irrational emotions involved with investing, but provides you with a steady, stable long-term strategy.
The built in advantage to dollar cost averaging is that you naturally purchase more shares when the price is low, but less when the price is high. Therefore, you systematically obtain an average price that is better than attempting to purchase based upon market timing strategies.
If you are not currently practicing dollar cost averaging, then there are three steps that will help you to begin a strategy plan. Start reducing your amount of risk today by implementing a dollar cost averaging plan that works.
How to set up a dollar cost averaging strategy
Dollar cost averaging allows you to invest your money over the course of several years, thus reducing your market risk. You essentially are provided with a cushion from major fluctuations in the stock price. If your investment funds are limited, this is a great way for you to begin building your portfolio. However, even the largest stock market investors practice the dollar averaging strategy for long-term investments. Dollar cost averaging is a successful strategy that will allow you to build an investment in a systematic and emotion free way.