By Paul Hogan
Patience is the key to building wealth over the long term and in a perfect world most investors understand this. Yet it’s very easy to let fear overwhelm you during stock market downturns and then to panic, sell, and lock in losses. On the flipside, when it’s a Bull market it’s easy to get “irrationally exuberant” and jump from bandwagon to bandwagon only to discover afterward that you missed most of the ride. Whether times are bullish or bearish, an emotionally-driven approach can leave you with significant underperformance and increased negative feelings. Since you don’t live in utopia, there is a solution that can help stabilize your emotions and potentially mitigate risk over the long term when investing. It’s called dollar-cost averaging.
Dollar-Cost Averaging (DCA)
If you contribute methodically through a payroll deduction into your 401(k) or 403(b)(7), you are already implementing this practice. DCA is a long-term investment strategy that involves investing a fixed dollar amount into an investment at regular intervals. Since you invest the same amount, you will purchase more shares when the price is low and fewer shares when the price is high.
Instead of investing lump sums, the idea is to average out the highs and lows to help you avoid trying to determine when is a good time to invest. While this technique does not eliminate the possibility of losing money on an investment, it takes advantage of the cyclical nature of the market and allows you to focus on long-term growth and ignore short-term market conditions. Of course, you must consider your financial ability to continually purchase shares.
FAM Funds’ Automatic Monthly Investment Program is called FAMvest. FAMvest is designed for you to invest in our mutual funds automatically every month without the hassle of remembering to write and mail checks.
When you retire, have college bills or other expenses, and need the money from your investments, FAM Funds offers a systematic withdrawal plan too. The benefits are similar to when you were investing because money is withdrawn automatically regardless of share prices.
In summary, DCA takes the guesswork out of investing and helps you benefit from price changes because you buy more shares when prices are low and fewer shares when they are high. Since no one can predict market upturns and downturns, and missing just a few of the best trading days can be devastating, a DCA strategy is recommended.