Stock Investing Using Dollar Cost Averaging

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As stated in the prior post, we should get it out of our heads that we can perfectly time the stock market over time.  There are some strategies though that can help you minimize your losses and maximize your returns.  One such method used by many people is called Dollar-Cost Averaging.

Most people that I talk with are buying stocks in their employer’s retirement plan (i.e., 401k, etc.).  When that is the case you are usually setup to have a certain percentage, or specific amount, taken from your paycheck and that amount is then put into your retirement account by your employer.  The beauty of that is that whenever you can automate things it usually means it’s going to happen on a consistent basis.  It’s similar to having taxes taken out of each paycheck, when it’s a smaller amount taken over time in an automatic way then you just don’t think about it happening.  You likely have designated which investments that the new money entering your retirement account will be buying automatically.  So, in this situation you are really following a Dollar-Cost Averaging approach.

Dollar-Cost Averaging is when you are buying investments in small chunks on a regular basis over a period of time.  It’s very passive.  It also takes a lot of the emotion out of your investing, which can be a big factor in minimizing your losses and maximizing your returns in the stock market because you aren’t tempted to try to “time the market” over and over.  Just be sure to not sell or switch investments based on emotions, instead stick to your financial plan over the long term.  What you will often hear as an argument against this approach is that it’s a “set it and forget it” approach to investing.  Usually you’ll hear that from people that are trying to sell you more active investing strategies that they believe will cause you to make more money.  If that’s the case, be sure to get evidence of their proven track record of their returns after all fees over a long period of time.

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