Dollar Cost Averaging is when you break up your investment to invest portions over time at regular intervals. For example, instead of investing $10K all at once, you could invest $2K every week for 5 weeks. If you contribute to a 401K, you’re likely already using this investing strategy contributing a portion of your paycheck every payday!
Why dollar cost averaging? Historically, market assets like stocks tend to rise over the long-term, but not consistently in the near-term. Dollar Cost Averaging reduces market timing risks as you’ll invest over time more when prices decline and less when prices increase. For example, a stock may increase 25% from $40 to $50, but the share price could fluctuate up and down en route (see Table below).
|Month||Investment||Price Per Share||Shares Purchased|
What about timing the market? While many people try to “buy the dip”, it’s really hard to time the market in the short-term. This is why Ursa prefers to focus on long-term investments in companies with strong fundamentals and growth prospects. We’re not saying don’t take advantage of market corrections, but regular investments can be beneficial as today’s prices could potentially be lower than the next correction you end up waiting for. Dollar Cost Averaging allows you to consistently add to investments－particularly beneficial for investors with longer-term horizons.
Who should use Dollar Cost Averaging? Dollar Cost Averaging is a great way to get started investing. It allows you start investing in the market regularly without waiting for a large lump sum to begin. In general, Dollar Cost Averaging is great for beginning investors with less starting investment, “set it and forget it” investors for low effort investing, and long-term investors not worried about market timing. Dollar Cost Averaging may not be great for short-term investors, larger ready-to-go investment amounts, investments with higher minimums or active investors that love following the market.
How should I get started? It’s very easy to get started and if you have a 401K at work, you’re already doing it. Many investment platforms like Ursa have a feature where you can set automatic deposits. A great way to start is syncing with your payday－schedule a deposit each paycheck and watch your account grow! It’s a great way to start an investing habit with minimal effort!