If you’ve actually heard the term “dollar cost averaging” before, then you’ve probably some experience in the world of investing — or at least have begun your research.
If this is new to you or you’re still trying to figure out what it is, let’s look at some names that might actually make more sense:
“The Kick Fear in the Face Approach to Investing”
“The Refusal to Time the Market Because That’s Cray Investing Strategy”
“The Buy Every Month and Don’t Worry About the Price Investing Strategy”
Okay, so maybe these terms don’t exactly clarify the meaning either, but at least they get to the heart of the matter.
Dollar-cost averaging is an investing strategy where you invest a fixed amount of money over a period of time so you don’t have to worry about buying into the stock market at the wrong time.
What’s the Deal With Dollar Cost Averaging?
Trying to make money through investing requires two things: buying in at a low price and selling at a high price.
Simple, right? Pay less, sell for more, turn a profit.
Of course, the term “low” or “good” as it relates to prices in the stock market are relative. Who’s to say what a good price even is?
That’s something most of us don’t discover until later after we’ve seen the value on our investments go way up (or way down). And those numbers can change on a daily basis.
Enter dollar cost averaging.
Developed to mitigate the risk of entering the stock market at the worst time. This strategy says forget about price.
Instead, simply buy in at the same time and amount every month and, eventually, the average price you pay will even out all the bumpy fluctuations that happened over the year.
It allows you to get off the stock market price roller coaster and instead, focus on things that actually matter.
Cash Is Still the Riskiest Investment
If you avoid the stock market because you’re afraid to lose your money, consider this:
Thanks to inflation, the value of cash will decrease over time. That means you need more money in the future to buy the same thing you could today, for less.
Even with the volatility of the stock market, historically it increases significantly over the long-term.
So if you’re keeping your entire life savings in a bank account, the value that your dollar holds (meaning how much it can buy) will go down over time, even as your savings increases.
If your goal is to invest but you’re nervous to do so, dollar cost averaging is the most user-friendly way to get your foot in the door.
At the end of the day if you have room in your budget to save money each month, getting some money into the stock market is better than waiting until you land on the perfect time or perfect strategy.