Investing can be a confusing topic. People who work in finance usually want it to be confusing because then they can make more money off of the regular investor. But it doesn’t have to be that difficult. Yes, there are TONS of different investments out there and TONS of ways to invest in them. But you don’t have to know all of them in order to become wealthy. One of the most beneficial ways to become wealthy over time is to use an investing strategy called dollar cost averaging. Let me show you how it works and why you should do it.
(1) What is dollar cost averaging?
Dollar cost averaging is a way to invest where you invest a specified amount of money on a regular basis. It’s really not as complicated as some people would have you believe. 🙂
When thinking about DCA, just think about putting money into your 401k, savings account, or other investment. Each time you get paid a certain percentage of your pay or a certain dollar amount goes into that account.
It doesn’t matter if the price of stocks are high, low, or the same as they were last month, you invest that certain amount/percentage into them.
Juxtaposed dollar cost averaging to lump-sum investing though. Lump-sum investing is where you invest a big sum of money in an investment at one time (hopefully when the price of that investment is low).
When you DCA, you don’t really care what the price of the investment is at any given time. You simply invest in it on a regular basis.
(2) Why should you use dollar cost averaging when you invest?
Yes, lump sum investing can often lead to bigger returns if it is done properly and if you were to, in fact, buy at the bottom of the market. However, do you know when the bottom of the market will happen? I don’t and I have been investing and teaching about investing for years.
So because no one knows when an investment will hit bottom, it is best to simply dollar cost average method when it comes to investing.
Sure, you may want to set aside some money in a savings account while waiting for the price of something to drop. There is nothing wrong with that AS LONG AS the bulk of your investing dollars are going toward DCA.
Or think about it like this: You wouldn’t “save” for retirement in a savings account while you are waiting for the markets to go down so you could buy in would you? Of course not! You should be saving for retirement on a regular basis, regardless of what the markets are doing.
DCA can help keep you on track with your savings goals as well. You don’t have the risk of saving money while you are waiting for the price of an investment to go down all for it to never go down.
Also, you don’t have to worry about saving that money while waiting to lump-sum invest and spend it on something else like a boat, a camper, a vacation, etc.
And the biggest reason that I suggest DCA is that it reduces your overall risk.
Think about it. If you lump-sum invest at what you think is the bottom of the market and it continues to go down, then you will lose money. But if you invest small amounts periodically, then if you were to lose on the investment, you would lose far less money.
Final Thoughts
Dollar cost averaging is such a good investment strategy that it has helped millions of people be able to retire comfortably and save money throughout their lives.
I use dollar cost averaging with my investments every month. And I would not suggest that you DCA if I were to not do it also. 🙂
I am here to help you!
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Until next time!
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