Investing seems intimidating to so many young people. Many don’t even begin, because they believe they don’t have enough saved up to really make an impact. Others worry about the potential risks in the stock market, focusing on the potential downsides without ever taking part of the upsides.
Fortunately, there is an investing strategy which not only makes it possible to start sooner, but also helps reduce the risk of buying high and selling low. It’s called Dollar Cost Averaging.
You might have already used this strategy in a 401k, or even in your own savings. The concept is that at regular intervals, you invest a certain amount of money.
For instance, many 401ks are set up to take a certain amount of money out of each weekly, bi-weekly, or monthly paycheck. Or, you might have your bank account set up to automatically transfer a certain amount of money each week away from your checking, and into your savings account.
Photo by Mathieu Stern on Unsplash
Lower Threshold
This strategy works great when used with index funds because you don’t need a lot of money to buy into an index fund.
How would this look?
Let’s say you decide you want to invest $50 per week in an index fund. Each Friday you would put the money into your investment account, and purchase the fund. It’s only $50, or less than $10 per day, so it’s definitely achievable.
By simply doing this, you’ll have taken part in the growth of the economy for much less than the thousands it would cost to create your own investment portfolio. If you did this for one year, you would have put aside $2,600 – on your way to a sophisticated portfolio!
Again, you don’t need much to put Dollar Cost Averaging to work. Just a small amount of money invested at regular time intervals.
Less Risk
On top of this, by doing this regularly, and not trying to time the market, you will end up protecting yourself from the ups and downs that plague many stocks!
Let’s take a look at this example. June decided to invest $100 each month into an index fund. As you can see, the stock went up and down. We’ll also compare it with how much she’d have if she’d invested it all at once, or if she had just kept it all in cash:
|
Strategy
|
Month 1
|
Month 2
|
Month 3
|
Total
|
|
Cash
|
$100
|
$100
|
$100
|
$300 in cash
|
|
All at once
|
Index Fund: $10/share
Purchase: 30 shares for $300
|
Index Fund: $8/share
|
Index Fund: $12/share
|
30 shares @ $12/share = $360
|
|
Dollar Cost Averaging
|
Index Fund: $10/share
Purchase 10 shares for $100
|
Index Fund: $8/share
Purchase: 12.5 shares for $100
|
Index Fund: $12/share:
Purchase 8.33 shares for $100
|
30.83 shares @ $12/share = $369.96
|
As you can see, this example only covers 3 months, and Dollar Cost Averaging is already ahead! Imagine how much more effective it will be over the course of a year. Or what if you consistently invested over the course of 10 years?
Why does this work?
The market will always experience ups and downs. Dollar Cost Averaging takes advantage of those times when the market is down to purchase more shares. Then, when the market is up, you’ll have a greater portion of shares, and thus greater wealth.
Ready to put this strategy to work for you? Sign up for a FREE Bronze Account today and speak with a licensed financial advisor. Remember, knowledge is only potential power. Real power comes from the ability to act on it.