Dollar Cost Averaging- What You Need to Know

Investing can seem intimidating and terms like “dollar cost averaging” often go right over our heads. It is so easy to get caught up with life, work and bills. Busyness and fear can lead us to living our lives without investing a penny. However, investing does not have to be time consuming or scary. It can be a fun life choice with low maintenance if given the chance.

There are some basic things you do need to know about investing before you jump right in. Many people adopt the strategy “buy low, sell high” when investing. If you are really good at predicting the unforgiving market, this may work for you. However, for many, this unreliable strategy can be what holds us back from participating in the stock market; we are not good at guessing when stocks will rise and fall, and thus we never get a chance at all.

There is another option for those of us who aren’t market professionals, but still want to be involved. Dollar Cost Averaging allows us to not have to stress about picking the exact right moment to put all of our eggs in the same basket. There is a lot less risk and a lot less that can go wrong.

Dollar Cost Averaging is a technique where the investor buys a fixed dollar amount of an investment on a regular basis, regardless of how much the share costs. When the market is down and prices are low, you buy more shares with your fixed amount. When the market is high, your fixed amount buys you less shares. The Dollar Cost Averaging technique is based on the premise that over time, and with your regular investments, you will make more money and your average share price will go down.

This technique only requires that you put in a fixed amount of money regularly. For example, I put $450 a month into a Roth IRA, instead of doing $5,500 at the end of the year. Therefore, I do not have to watch the market to see exactly what is happening, since watching the stock market is something I don’t do regularly.

For those of us who may not have time to stare at the stock market, this can be a great option for investing our money. Choose an investment that you believe in and feel certain will grow over time. Decide what you can afford to contribute each month, and devote that money into the stock consistently, regardless of whether it is up or down.

The only way to make this technique work is to stick with it over a period of time. It is a long term strategy, and you should not expect to see immediate results. However, if you can stick to the plan, your long term results can surprise you.

If you are intimidated by the unpredictable stock market, consider giving Dollar Cost Averaging a chance. There are so fewer risks for novices with this more laid back approach to investing. Don’t let yourself get so caught up with your work that you forget to invest! You may truly thank yourself later for taking the time to consider it now.