July 11, 2013
What is dollar-cost averaging and why should you use it when investing your money for your future freedom?
What is dollar-cost averaging and why should you use it when investing your money for your future freedom?
Dollar-cost averaging is when you buy a fixed amount of a certain investment on a regular schedule. Using this method and not trying to time the market will put you on the track to begin getting compound interest on your investment.
Well said, Thomas. Let’s take a look at how this happens. When you invest $300 a month into a mutual fund you will be buying at a specific share price. Let’s say that number is $30 per share. This will buy you 10 shares (300 divided by 30). The next month the market has gone up so the share price is now at $35 per share. Now that $300 has purchased 8.57 shares (300 divided by 35). The next month the the market drops and your shares price goes down to $27 per share. Now that $300 has purchased 11.1 shares.
Over time, dollar-cost averaging will provide you the chance to buy fewer expensive shares and more cheaper shares. This is simple and easy to do. Set your investments up on automatic pilot, pay yourself first at the beginning of the month, and let time and compound interest do their trick. P.S. Don’t forget what Thomas stated. DO NOT try to time the market, you can’t, I can’t, and all those “experts” cannot with any consistency.
This can easily be done with your company retirement plan and a Roth IRA at a place like Vanguard. Get started, automate it, and be patient. YOU can do this!