Dollar-cost averaging: Make your investing automatic and increase your savings

Dollar-cost averaging is the practice of investing a consistent dollar amount into a given investment on a regular basis. This allows you to invest no matter how well the markets are performing. However, as is the case with any investment strategy, you need to consider the potential pros and cons. It will help you to decide whether it’s the right way to invest for you.

Pros

• Ensures disciplined investing to potentially save more. With a consistent dollar amount invested regularly, such as through pre-authorized deposits, you may find that you don’t need to think about your investment strategy all the time. Or worry that you’ve forgotten to contribute. Dollar-cost averaging thereby becomes a simple, hassle-free way to be a disciplined saver. Further, because you are consistently investing, this approach may allow you to save more money over time.
• Reduces the effects of market volatility. Whether periodic purchases are scheduled weekly, monthly, or quarterly, they come with the certainty that unit prices each time you buy will differ. This may lower the average cost of investing and allow you to purchase more units. It will also reduce the effects of volatility on your portfolio.
• Avoids the stress of market timing. Traders and other financial professionals may attempt to time the market as part of their strategy. Most individual investors find this practice stressful and are rarely successful. It’s not easy to time optimal moments to buy or sell. Dollar-cost averaging helps mitigate worry because you’re not trying to time the market.

Cons

• Possible loss of return. When markets are rising steadily, you may miss out on certain gains when making several smaller purchases at different times. However, over the long term, the strategy of dollar-cost averaging reduces this risk.
• Patience is important. Dollar-cost averaging offers the greatest benefit to investors who have a long-term investment horizon and can afford to be patient. Especially if they started such a discipline early on in life. If you don’t have a long-term investment horizon, it may not be the best way for you to invest.

In short, dollar-cost averaging can be an attractive option for investors who:

• are investing with a long-term horizon,
• can afford to be patient,
• want to invest hassle-free with a disciplined approach.