Easing into the market with dollar cost averaging
Some investors let their emotions rule their decision-making process as they try to keep up with stock market gyrations. In today’s unpredictable market, trying to anticipate the next trend can prove costly for the average investor. Even sophisticated investors and Wall Street professionals don’t often win at market timing!There’s a much easier way to ease into the market – it’s called dollar cost averaging. This strategy is not only uncomplicated, but it also can manage times of volatility and may decrease your average share price while potentially increasing your average capital gain. It may allow you to roll with market trends instead of being caught by them.The strategy is simple. You invest fixed-dollar amounts at regular intervals over time, regardless of market fluctuations. You may be able to lower your cost per share by investing this way over the long term, rather than plunking down large sums of money intermittently when market conditions appear to be favorable.
With dollar cost averaging, you put a fixed amount of money into an investment fund, for instance, on a regular schedule, regardless of whether the investment’s price happens to be rising or falling. By its very nature, this strategy gives you this guarantee: you will always buy fewer shares when prices are higher and more shares when prices are lower.For example: Let’s say you’re interested in buying shares in XYZ mutual fund. Instead of dollar cost averaging, you could buy a fixed number of shares, say a 100-share lot each quarter for a year. With an initial price of $20 a share, then $12, $15 and finally back to $20 a share, your average price would be $16.75 a share. During the year, you would have bought 400 shares for $6,700.
Dollar cost averaging can only be effective if you have the discipline to stick with it in spite of normal market fluctuations and corrections. You must be willing to proceed with your investment plan over a period of several years.You must have the confidence in your investment to sit back and wait while share prices dip, knowing that you are buying at lower-than-average prices. If your fund rebounds, you will come out ahead due to your ownership of the larger quantities of shares you automatically purchased when prices were low. You should consider your financial ability to continue purchases through periods of low price levels. Generally, stock market investing should only be viewed as a long-term plan, with other financial programs in place for short and intermediate term goals.Since the stock market rarely moves in a straight line, dollar cost averaging is often a good strategy. It can be a good approach when you’re investing in mutual funds that offer long-term growth potential but short-term price fluctuations. Of course, it’s important to understand that dollar cost averaging cannot guarantee a profit and does not protect against loss in declining markets. Dollar cost averaging involves continuous investment in securities regardless of fluctuating price levels of such securities. The investor should consider his/her financial ability to continue purchases through periods of low price levels. Contact a financial professional today to help you determine if dollar cost averaging is appropriate for your financial plan.Jeffrey Apps and Tracy Tutag offer securities and investment advisory services through AXA Advisors, LLC (member NASD, SIPC) 1290 Avenue of the Americas, New York, NY, 212-314-4600, and offers annuity and insurance products through an insurance brokerage affiliate, AXA Network, LLC and its subsidiaries. They can be reached locally at (970) 926-0601, or at email@example.com colorado