Dollar Cost Averaging

When I want to sound smart and intimidate people, I calmly look at them, chew on a muffin for a few seconds, and then throw it against a wall and scream, “DO YOU DOLLAR-COST AVERAGE???” People are often so impressed that they slowly inch away, then whisper to people around them. I can only guess that they’re discussing how suave and knowledgeable I am.

Dollar-Cost Averaging: Investing Slowly Overtime

Anyway, “dollar-cost averaging” is a phrase that refers to investing regular amounts over time, rather than investing all your money in a fund at once. Why would you do this? Imagine if you invest $10,000 tomorrow and the stock drops 20 percent . At $8,000, it will need to increase 25 percent (not 20 percent) to get back to $10,000. By investing at regular intervals over time, you hedge against any drops in the price —and if your fund does drop, you’ll pick up shares at a discount price. In other words, by investing over time, you don’t try to time the market. You use time to your advantage. This is the essence of automatic investing, which lets you consistently invest in a fund so You don’t have to guess when the market is up or down.

Here, we covered your automatic infrastructure. To set up automatic investing, configure your accounts to automatically pull a set amount of money from your checking account each month. See details. Remember: If you set it up, most funds waive transaction fees.

But here’s a question: If you have a big pile of money to invest, what’s the better option: Dollar-cost averaging it or investing the entire lump sum all at once? The answer might surprise you. Vanguard research found that lump-sum investing actually beats dollar-cost averaging two-thirds of the time. Because the market tends to go up and stocks and bonds tend to outperform cash, investing all at once produces higher returns in most situations. But—and there are several buts—this isn’t ‘t true if the market is going down. (Of course,…

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