Dollar Cost Averaging

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• How to use dollar cost averaging

How to use dollar cost averaging

Dollar-cost averaging is a useful investment tool which can be used in the following ways:

Regular Savings
We suggest that you invest your savings on a regular basis: monthly, for example. All investment markets are volatile, not only the stock market. It's inadvisable to try to second-guess the market in order to time your investments. Although opinions proliferate about the direction of interest rates or the stock market, even the experts struggle to accurately judge market timing. Drip-feeding your savings will allow you to use and take advantage of the technique of dollar-cost averaging.

Lump-sum Investments
If you have a lump-sum investment to make, you run the risk that a sudden fall in the market could quickly wipe out a substantial portion of that investment.

Alternatively, if you've been saving hard for many years for your retirement, you run the risk that a sudden fall in the market will quickly reduce the value of your retirement investments.

In both examples, you can use dollar-cost averaging to protect the value of your investments.

In the first example, instead of investing the lump sum immediately, you could dollar-cost average your investment into the market over a period of several years. This would protect your initial investment from any sudden fall in the value of the market.

In the second example, you could dollar-cost average your retirement capital out of the market. That means you don't have to worry about the level of the market when you retire, as you can gradually use and reduce your investment capital over the length of your retirement.