One of the keys to successful investing is staying the course and sticking to your strategies to achieve your financial goals. That’s often easier said than done, especially when the markets become volatile. Our emotions can enter into the equation and make us second guess ourselves and our well thought out plans. Recent market volatility has prompted many of our clients to call with questions about investing. They want to know if we think the market has reached its low and if this is a good time to buy. Unfortunately, no one has a crystal ball to foresee what the future holds. So, what should an investor do who wants to invest in the market, especially with larger sums of money? In these instances, we may suggest that they dollar cost average into the market over a period of time.
What is dollar cost averaging? Simply put, dollar cost averaging is a strategy of investing a fixed dollar amount on a regular basis to reduce the impact of volatility on larger purchases. Think of your retirement plan at work. Your annual contribution amount is split evenly over the course of an entire year, instead of investing it all at once. The investments are made on a systematic basis, oftentimes monthly. Some months the funds you buy are priced higher and some months they are lower.
Investing regular amounts steadily over time (dollar-cost averaging) may lower your average per-share cost. Periodic investment programs cannot guarantee profit or protect against loss in a declining market. Dollar-cost averaging is a long-term strategy involving continuous investing, regardless of fluctuating price levels, and, as a result, you should consider your financial ability to continue to invest during periods of fluctuating price levels.
By investing the same dollar amount each month, when the market does drop, you then buy more shares. Think of this a “buying on sale.” When the market does rise, you now recover more quickly because you own more shares.
Investors usually hope to buy low and sell high, but timing the market rarely, if ever, works to their advantage. The best strategy is to remember your goals and stick to your plan with consistent, systematic investing, that in the end, should help you grow your portfolio.
If you have questions about investing or need a fresh perspective on your financial portfolio, call Hovis & Associates at 636-937-4343 to schedule an appointment.