Dollar-cost averaging
Now can be a good time to invest additional dollars toward your goals with an investment approach known as dollar-cost averaging. The concept is simple – put money into investments on a regular basis, regardless of market conditions.
Dollar-cost averaging into a declining market
With dollar-cost averaging, when prices are low, your investment purchases more shares. When prices rise, you purchase fewer shares. Over time, the average cost of shares you purchased will usually be lower than the average price of those shares. It's a disciplined way to keep saving despite market volatility.
Here is an example of what can happen when regular investments are made in a market that declines in value before recovering. Let's say someone invested $1,000 per month in a stock over six months, with share prices starting at $20, then $15, then $10, then down to $5 for two months, and finally back up to $10 in the last month. The $6,000 invested during this six-month period netted the investor $6,166.70 even though the share price declined by 50%. Here the dollar-cost average approach earned 2.78% on the total invested, even in a declining market. By continuing to invest when share prices declined, more shares were purchased, which benefited the investor as share prices began to recover.
Investing through your workplace retirement plan is a great way to use this type of systematic investment strategy.
Dollar-cost averaging does not assure a profit or protect against loss in declining markets. This type of plan involves continuous investment in securities, regardless of fluctuating price levels. Investors should consider their ability to continue investing during periods of low markets.
