Dollar-cost averaging is the strategy of spreading out your stock or fund purchases. You invest your money in equal portions, at regular intervals, regardless of the ups and downs in the market. For example let’s say you receive an inheritance of $12,000. Instead of investing all $12,000 at once, you split up the money into 12 purchases of $1,000 a month for 12 months. Most people are using this investment strategy without even realizing. If you contribute to a 401(k) or another type of defined contribution plan, you’re already engaging in dollar-cost averaging.

Three benefits of Dollar-Cost Averaging

1. Emotion

The most common error in investing is investing with emotion. Too often investors fluctuate between fear and greed for what they think the market is going to do. However, by utilizing the dollar-cost averaging strategy and having a set reoccurring contribution the emotion is removed all together. In addition, the benefit of instilled discipline is added to your investment strategy as you fulfill your established plan. This can help to continue to build good investment habits going forward.

2. Long-Term Plan

Dollar-cost averaging provides you with the ability to seed the market with small sums of investments. By doing so over a long period of time you are able to better manage the volatility of investments such as stocks, ETFs and mutual funds. For this reason, dollar-cost averaging is ideal for investors with a long-term investment horizon.

3. Avoid Market Mistiming

No one can predict where the market is going at any given time. By holding money on the sidelines waiting for the ‘right time’ you may miss out on the opportunity to see the biggest upside. By having the multiple reoccurring contributions, you are always investing in the market. For more information on the dollar-cost averaging strategy, listen to my interview with Clay Moden on 106.5FM WYRK. Furthermore, if you’d like to discuss further investment strategies, set up an appointment with us today.

WEEKLY SEGMENT ON WYRK

You can catch our weekly Plan.Protect.Invest. segment live on WYRK 106.5FM at 7:20am every Wednesday. Each week we will have a Sgroi Financial planner on with Clay Moden and the WYRK morning show to discuss financial topics to educate and help their listeners. Since 1971, Sgroi Financial has proudly served Buffalo, NY and the Western New York community from our West Seneca location.