Is it true that dollar-cost averaging can change your life? Did you know that it could positively change the outlook of your investment portfolio?
In early stages of COVID-19, the stock markets took a big hit. There was a lot of confusion in the midst of massive losses and encouraging gains, and nobody knew exactly what to expect. It’s the impact from this type of volatility that dollar-cost averaging (DCA) seeks to protect investors from. It’s a strategy that seems to be most effective when the markets are performing at their worst. I’m not an investor, but I understand the basic concepts of dollar-cost averaging and how it can be beneficial to an investor’s bottom line.
Here are the best articles about dollar-cost averaging that I found during my research on the topic. You can read about how you can use it to build wealth over time; how it’s calculated and how you reap the benefits. However, as with everything in the personal finance world, there are some drawbacks which you should take note of as you plan your investing strategy.
1. What Is Dollar-Cost Averaging and When Should You Use It? (Nerd Wallet)
Nerd Wallet explains that with DCA, you purchase your investments at regular intervals and in roughly the same amounts. The article breaks down the concept even further through a series of scenarios which illustrate how dollar-cost averaging works. It also notes that it is a longer-term strategy which allows the investor to move in tune with the market and make better decisions.
2. Use Dollar-Cost Averaging to Build Wealth Over Time (Investopedia)
Although dollar-cost averaging might sound like a new concept, Investopedia says that if you have a 401 (k) retirement plan or a pension fund, you are already using this strategy. This is because the concept is built on a strategy where you’re investing the same amount of money over a regular interval, ignoring the ups and downs in the market. It’s touted as a safer method of investing that reduces the investor’s risk.
3. Don’t Get Caught In the Dollar-Cost Averaging Trap! (Rule #1 Finance Blog)
Remember when I said that there are some potential drawbacks to DCA? Rule #1 Finance Blog plays the role of devil’s advocate and brings a bit of food for thought. One point made in the article is that some economists and academic finance researchers say that dollar cost averaging is a “gimmick” and does not “meaningfully reduce risk when compared to other strategies.”
4. Ask the Spud: Should I Use Dollar-Cost Averaging? (Canadian Couch Potato)
I love this question on Canadian Couch Potato about dollar-cost averaging that was asked. “If I have a large sum of cash to invest, is it better to put it into the market all at once, or invest it gradually to take advantage of dollar cost averaging?” To answer the question, the author considers both options. However, for me, the advice about whether to use DCA, is sound and effective. “If you use dollar cost averaging, do it right.”
Are you convinced that you dollar cost investing is the best investment strategy for you? What do you think about the links shared in the article?