If you have destroyed debt and saved up an emergency fund, then it’s time to start investing for the future. Learning how to invest money isn’t hard, yet like swimming takes practice.
I advise consulting an investment professional before you delve into the world of investing. [How to Choose an Investment Professional]
One basic investing technique is called dollar cost averaging.
What is Dollar Cost Averaging?
This is a very basic investing principal. I’ll admit it’s not sexy, nor will dollar cost averaging earn instant rewards. It can however provide a basic blueprint for investing over the course of your investing career.
Dollar cost averaging is basically investing a certain amount from your paycheck each month year after year. The cost of your investment will thus be averaged out over time.
drip. drip. drip. drip. That’s the sound of dollar cost averaging (or pound cost averaging for my U.K. readers).
If you invest $50 a month that is $600 a year. Up that amount to $416.66 a month and you’ve just fully funded your ROTH IRA for the year!
Why Use Dollar Cost Averaging?
So why use this method of dollar cost averaging (DCA)? I’m glad you asked. Here are a few common advantages.
- You can’t time the market. This basically means you don’t know when the market will be high or low. If you invest a little each month, you’re investing at both high and low share prices–despite the wild swings of the market.
- It automates and takes the emotion out of investing. If you invest only when prices are low, you’re not likely to invest.
- You’ll buy more shares when prices are low since your dollar (pound) amount is set.
- Dollar cost averaging ensures a good nights sleep. Since your investing plan is set despite changes in the economy, political elections, or zombie attacks you’ll sleep better. I can’t imagine trying to decide each paycheck if I’d invest or not.
*Note if you have a large lump sum and want to invest, dollar cost averaging may or may not not be best way to go. Consult a fee based advisor to determine what route is best for your lump sum.
More Dollar Cost Averaging Articles Across the Web
- Dollar Cost Averaging; Not Just for Stocks
- Investing in the Stock Market Over the Past 10 Years: How Did Dollar Cost Averaging Fare?
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