Are you interested in a strategy that may help take out some of the timing guesswork? Much to do about when to buy a particular stock can confuse the beginning investor and can be avoided when you use Dollar Cost Averaging. This strategy allows you to ignore all the noise about market conditions while concentrating on long-term growth.
This may sound like a complex involved process but it really simplifies everything and allows you to put your investing on autopilot. Dollar-cost averaging is a system of buying the same dollar amount of a stock or mutual fund each month (or week or other specific period) so that the price you buy averages out over time. This keeps you free from the guesswork of moving in and out of a type of fund, or trying to time your stock purchases.
You will sometimes buy low and sometimes high, but in the long run your total cost will average out. Obviously you will purchase fewer shares for the same amount of money when prices per share are high and more shares for the same amount when the share price drops. It is important to reinvest dividends and these automatically are added to your overall investment portfolio.
History shows that over time the average cost of your shares will generally tend to be lower with dollar- cost averaging than if you had made a single one- time investment of the same amount. If you invest in a 401(k) or other retirement plan at work, you may be already using dollar-cost averaging. You probably contribute a fixed amount each pay period to your account, which is then used to buy shares in one or more mutual funds. Over time, your regular purchases will probably reduce the average cost you pay for all your shares and that can help increase your returns.