Invest a set amount every month. This is called dollar-cost averaging.
Build your wealth consistently.
Most people want to achieve their goals quickly and that too, without putting in the requisite work to get there. But this is not real life. Things take time to happen – you don’t become a college graduate overnight, you don’t learn a skill overnight and you don’t become the best at what you do overnight. Getting to your goal takes time and consistency. The same is true with becoming wealthy – it takes time and consistency. The best way to achieve long-term wealth is to be disciplined. How? By investing a set amount into the stock market every month.
Invest a set amount every month. This is called dollar-cost averaging.
What is dollar-cost averaging?
Dollar-cost averaging is investing a set amount every month, consistently, regardless of the stock or market price. For the investor, it just means that on a particular day on a consistent time period (every month usually), the investor invests a set amount into her investment – whether in a particular stock or in a broad-based market index, like the S&P500 Index. Usually this investing strategy is used with broad based market indices, because there is not much research that needs to consistently be done – you just invest in the market and simply “forget” about it. For more information, see our post “No Time for Research? Invest in an Index…”
What are the benefits of dollar-cost average investing?
There are many benefits to this investment strategy:
1. You are consistently investing in the market.
Having the discipline of investing a set amount of money during a set time period takes the work out of investing. You could literally direct a certain amount of money to be automatically transferred every month into an investment account and automatically invested into your index of choice. You don’t have to do anything more than set this up. Not only does this keep you consistent, it also ensures that you “pay yourself first” by not spending that money on short-term pleasures. It helps you plan for the long-term and ensures that you are investing over time and essentially keeps you disciplined. (See our posts “Time is your friend” and “Discipline is sacrificing short-term pleasure for long-term gain”)
2. The price of the investment does not matter to you.
Not only are you keeping the long-term in mind, by investing using a dollar-cost averaging strategy, you are “averaging” the cost of your investment over time. You don’t need to time the market (which does not work anyway) and the overall value of the stock market does not matter to you, because you are simply concerned with putting your money to work (See our post “Put your money to work by investing it”) and doing so in a consistent and disciplined manner. This is beneficial especially to those investors who don’t have the time to do more in-depth research into specific stocks, but who simply want to be invested in the stock market.
Over time, you could end up with a lower average cost and higher number of shares purchased if you dollar cost average over a time period versus simply buying the shares in one lump sum.
3. Keeps the emotion out of it.
Investing can follow certain sentiments, namely that of “fear” and “greed.” By investing every month, you keep the emotions out of your investment. Your only goal is to invest consistently over time, to help build long-term wealth. See our post “Long-term value of $1 invested vs. long-term value of $1 saved.”
Warren Buffett once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.” This is easier said than done, especially if you are just new or beginning to invest. Dollar-cost averaging helps manage these emotions.
What are the drawbacks of dollar-cost average investing?
At the same time, you should know the drawbacks. In particular, transaction costs can increase. However, this was more of a concern before when commissions were not zero or very low. In addition, the market tends to be in an uptrend over long-periods of time and you could end up with a higher average cost basis than if you invested a significant amount upfront. See our post “Overlook short-term volatility in favor of the long-term trend.”
That being said, if you are investing money as you earn it (for most of us), then dollar-cost averaging is a good investing strategy to consider.
Overall, the benefits outweigh any potential drawbacks
For new or beginning investors, we strongly believe that any benefits of dollar-cost averaging outweigh any potential drawbacks. As “Time in the market beats timing the market,” this strategy will ensure that you are invested and that you continue to invest. This is especially critical as you grow long-term wealth. If you need to determine which index to invest in, check out our course titled “Investing in ETFs and Index Funds,” which will help you with exactly that.
“Dollar cost averaging is a tool – an arrow that should be in everyone’s quiver
– CFP Diane Rolfsmeyer
“If you like spending six to eight hours per week working on investments, do it. If you don’t then dollar-cost average into index funds.” –Warren Buffett
Key: Invest a set amount every month. This is called dollar-cost averaging.
Check out our website SHALnCO for more resources on investing, including courses and eBooks.
Nothing in this email is intended to serve as financial or investment advice and you should do your own research and consult with appropriate advisors.