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Dollar Cost Averaging (DCA) is a simple but powerful investment method that is excellent for new and practiced investors alike. If you are new to saving and investing or are generally averse to risk, putting your money at the mercy of the market likely feels daunting or scary. We have all heard “buy low, sell high”, but how do we do that? How do we prevent ourselves from buying the wrong investments at the wrong times? How do we get in the habit of investing for the long term? DCA answers all these questions.
How to get started
The best way to get started investing with dollar cost averaging is to establish an investment account with a low cost mutual and index fund provider (Vanguard or Fidelity are good choices), choose a broad-based fund that replicates the whole market, and set up your investment fund to automatically invest a certain amount of money for you each month. Remember, if it is your first time investing, try not to obsessively check the value of your investments every day. You are investing for the long term and while the market will go up and down, you will be able to invest at an average lower cost than the market if you stick to dollar cost averaging and don’t panic and stop investing when things go down or try to allocate more money when you see the market has moved up the month before.
A Note on Windfalls
It is an awesome day. You just got a $1,500 tax refund that you want to invest. Typically, you have been doing dollar cost averaging and have only been putting the $100 you have for savings into your investments each month. So do you put the whole $1,500 in the market now? Or slowly leak it in $150 a month for the next 10 months?
Dollar cost averaging is excellent for normal way investing and for reducing risk over the long term. But one of the other reasons that DCA works is because you are putting your money in the market as soon as possible. Over the long term, the market is increasing and if you have the discipline to put the money in for the long term, the sooner you can invest the better. Vanguard did a study about voluntary DCA* that showed two-thirds of the time the investor would have been better off investing the money as soon as they received it instead of investing it via DCA.
*Voluntary dollar cost averaging is when you are sitting on cash and intentionally investing it into the market slowly.
What is your investment strategy? Do you practice dollar cost averaging?