So you’ve decided you are ready to invest. You’re tired of just squirreling your hard-earned money under the mattress or making next to nothing in a savings account. But there’s something about putting a whole bunch of your money into that investment all at one time that just feels a bit…well, scary. In this case, that gut feeling of concern could be justified.
You may have already heard of dollar cost averaging. As usual, the investing experts have managed to come up with a spectacularly long and confusing name for a really simple concept. Dollar-cost averaging means that instead of investing all your money at one time you put it in a little bit at a time. So, for example, instead of waiting to put together $1,200 and then investing it all at once, you would put in $100 a month for 12 months.
Why should you care about DCA? Because the way you put your money in will affect how big or small your returns are. If you had perfect foresight and could time the market with 100% accuracy, it would be simple to choose when to invest your money. Sadly, nobody has that kind of prescience, and in fact, almost nobody is very good at timing the market at all. Therefore, using DCA allows you to purchase some shares at lower prices when the market is down, and some shares at higher prices when the market is up. This ensures that you don’t get burned by putting too much in when the market is high, only to see the prices drop later and leave you with a loss.
At GoalMine we generally like DCA as an investing method for two reasons: first, losing money is often a lot more distasteful and harmful to people then is the risk of not making as much. So we would rather reduce risk somewhat–even if it means reducing reward a little as well. Second, DCA really creates the kind of investing behavior that we think is the real key to success: it helps you create an investment plan and stick to it no matter what the markets are doing. As we always say, people aren’t good at trying to time the market. If DCA helps you focus on creating a disciplined investing approach rather than on the roller-coaster rides of the market, then we’re in.
Image via iChaz
