In a world full of "financial
experts" it is more important than ever for investors
to study their alternatives before rushing into decisions. The reason for
this is that often times these so called experts promote completely
opposing views. This commonly occurs in information
pertaining to proper investment intervals and amounts. One of the more
highly touted techniques in existence today is called dollar cost
averaging.
Dollar cost averaging is the practice of investing a set
amount of money on a particular stock (or fund) at regular intervals.
For example, an individual might choose to invest $100 in a
particular stock on the 1st of every month. Regardless of whether the
stock is doing well or poorly the person continues to place in $100
at the same time each month. This behavior tends to smooth out any
fluctuations in the stock price. In affect this method allows people
to purchase more shares of stock when the prices are low and less
shares when they are high. This technique can virtually eliminate
the risk that a person will repeatedly purchase stocks when the
price is high. Unfortunately, "buying high" is often exactly what
happens when people attempt to time the market. Delaying a purchase
until a stock begins to show growth is almost a sure way to miss out
on low prices. By the time a transaction is complete the largest
percentage of gain is long gone, which often leaves the investor
with no where to go but down.
Here are some of the major advantages associated with dollar cost
averaging:
- Convenient. This method makes it
unnecessary for individuals to analyze data and chart current
trends. Likewise, there is no need to determine when to purchase
larger amounts and when to scale back. Additionally, many
companies allow investors to set up automatic accounts so that
payments are automatically deducted.
- Affordable. There are a wide range of
companies that offer people the opportunity to set up dollar cost
averaging style accounts with very low investment requirements.
- Reduces risk. The nature of this method smoothes out the
movements in the market and works to eliminate risks.
When attempting to choose an investment strategy it is important
to remain focused on your goals and objectives. If this involves getting a good value for your investment
dollar over a long period of time, then you just may want to look into
dollar cost averaging. This alternative reduces the
amount of investment risk and
creates a win/win situation for investors. If stock prices go up
then so does the value of your portfolio. However, if
stock prices go down, then this creates an opportunity to purchase additional shares
of stock at bargain prices.
