Managing investor risk through Dollar-Cost Averaging | Tips From Our Financial Advisors
Professionals, pre-retirees and retirees in Metro Detroit and across Southeastern Michigan are frequently concerned with market volatility. Seasoned investors have generally learned that trying to time the market can often be a losing game. Regardless of your level of experience investing, there are strategies to minimize risk and maximize your returns. In our latest article, we’re highlighting what you need to know about one of these strategies: Dollar-Cost Averaging.
What is dollar-cost averaging?
With a dollar-cost averaging strategy, you invest a set amount of money into your investment portfolio over regular intervals, rather than investing a large sum of money at once. This allows you to get into begin investing without having to put a large amount of capital into the market right away. Dollar-cost averaging allows you to buy more during market slumps and less when the markets are high, without trying to play the market in the short term.1
There are quite a few benefits to dollar-cost averaging as an investment strategy. Dollar-cost averaging can help you:
- Buy more shares: Over the long term, the price of assets trends higher. By using dollar-cost averaging, you may be able to use the ebb and flow of the market to buy more shares over time than if you made a big one-time purchase.
- Invest consistently: Dollar-cost averaging helps you maintain consistency with your investing strategy. Many people may not realize that they are already utilizing dollar-cost averaging if they are setting aside pre-tax dollars to invest in a company-sponsored 401(k).
- Set it and forget it: Rather than trying to time the market in the short term, dollar-cost averaging allows you to invest in assets that are more likely to have staying power. This is an especially useful strategy if you don’t want to monitor the stock market.
What about lump-sum investing?
There is research that shows that over the very long term, lump sum investing can outperform dollar-cost averaging. If you get a bonus or a sudden inheritance in general, you’re better off investing it as soon as possible. While returns aren’t guaranteed, it’s also more likely that you’ll see a return over having that money accrue minimal interest in a bank.
However, there are some key caveats. While lump-sum investing outperforms dollar-cost averaging most of the time, dollar-cost averaging still wins out in one-third of cases. The idea of investing a large sum of money at once can be intimidating to many investors, so it’s important to consult with an advisor who understands your risk tolerance before you make big decisions with your assets.
Why should investors consider dollar-cost averaging?
In general, dollar-cost averaging can best help beginner investors, investors without much money to invest right away, or those who are investing for the long-term but don’t want to have to keep up to date with the financial market. However, if you’re investing for the short term, or have a lump sum to invest, you might want to pursue another investing strategy.1,2
For most of the people we work with, the strategy that fits them best may be a combination of dollar-cost averaging and lump-sum investing. Everyone’s situation is different, which is why it’s important to work with a financial advisor so they can help you develop a strategy that works for you and your family.1,2
Regardless of the amount of money you have, the worst thing you can do is not invest at all.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.