Overall, April was a good month for investors. The market has been up and people are starting to recover some of their losses. Some investors who have been sitting on the sideline with cash are ready to get back into the market but want to limit their investment risk. Dollar Cost Averaging is one way to do this.
What is Dollar Cost Averaging?
It is a method of investing where you systematically buy shares at a set amount and at set intervals. For example, if you have $12,000 you received in your divorce settlement and want to invest it, you might consider investing $1,000 in the market every month for a year. Typically, investors who have a dollar cost average strategy buy mutual funds. If you have a 401(K) plan with a payroll deduction you are probably already doing this without realizing it.
How do I develop a Dollar Cost Averaging strategy?
* Decide exactly how much money you want invest.
* Decide the time frame of your intervals. Do you want to invest weekly, monthly or quarterly?
* Select an investment that you want to hold for the long term, preferably five to ten years or longer.
* You may be able to set up an automatic withdrawal plan so they money is invested at each internal and the process become automated.
What are the benefits of Dollar Cost Averaging?
We know on average most of the large market gains happen on 10 or 12 days of the year. You have to be in the market on those days to experience the gains. The challenge is knowing exactly which days those will be.
You can take the guesswork out of it and reduce your risk by systematically investing in the same fund regularly, no matter the price. For example, on Monday a share in a selected mutual fund might cost $9.50. A month later, the same fund might cost $9.35 a share and still another month later be trading at $10.00 a share
Dollar costs averaging allows you to smooth out the market fluctuations and systematically get back into investing. Some months get a bargain, other months you are paying a premium. But the idea is that over time, you will experience a net gain. Talk with your financial advisors to see if this strategy makes sense for you.
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