Dollar Cost Averaging

Written by , January 9, 2011

The technique of using dollar cost averaging for investing means that consumers make regular investments (most often monthly) into an investment portfolio. It works as an alternative to investing large lump sums. This allows the cost of investments to be lower, in theory. A lower investment cost means that a consumer will see more potential profit from the investment.

The dollar cost averaging strategy can be used to begin investing small amounts over a set period of time. It also works to break up lump sums into smaller increments, reducing the amount of fear about a fluctuating market.

There are pros and cons to the dollar cost averaging technique of investing. The strategy can be used for any level of investor. Understanding the dollar cost averaging investment technique will help consumers decide if it works for their particular needs. Here is some information and advice about dollar cost averaging.

Basics of Dollar Cost Averaging

  • Dollar cost averaging works best when investments are made at a consistent amount and over a longer period of time. Consumers need to be sure that the investment amounts can be made for the long term.
  • Spreading out the exposure of investments over the long term can help to reduce the fears associated with price adjustments in the market. It may feel less risky when only small amounts are being invested at one time.
  • Dollar cost averaging can be more affordable to the average investor. Being able to invest in smaller amounts over a longer period makes creating an investment portfolio more attainable for most consumers.
  • Investing with the dollar cost averaging can be added into any budget. The consumer determines the investment amount and the investment intervals. This strategy helps for a habit of investing that can lead to even more investing in the future.
  • The thing to know about the dollar cost averaging technique for investing is that it IS investing. It may be the best tool that gets consumers moving in the direction of investing for tomorrow. Experts show how the dollar cost averaging may not yield the highest rates of return, but they do get consumers in the habit of investing.

    No matter what investment strategy eventually takes shape, having an investment plan helps establish a firm financial foundation for the future.

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