As the saying goes “time in the market beats timing the market”. Despite what you might think, you, me and most people cannot out trade super computers. We simply cannot process the amount of inputs, and we simply cannot manage our emotions consistently enough in order to make the right trade at the right time. However the good thing for us is that we don’t have to. We can employ certain strategies that are not time restrictive and are simple to understand. One of the most popular simple investing strategies/techniques is Dollar Cost Averaging.
So what is Dollar Cost Averaging? When investing, the typical investor would buy one time and then forget about the investment. To be honest, this is probably the method that most people should be taking, because it signifies that someone is at least comfortable in their investment decision (because it can be assume they actually did research on the company/investment). But if the stock drops over time their total investment cost is still at the exact same price they bought in at and this means they are losing money.
For example if I bought at stock at $10 and did nothing after? Well if I did that I, of course would have an average of $10. If the stock sank to $8 then my average would be $2 more than the current price and I would in the “red” by those $2. However what if I bought another share at $8? Well if I did that then my average would be $9, and if by chance this stock rose to $14 then I would be in the money by $5 per share. This is a greater profit then if I just held the stock the entire time ($4 profit from my initial $10 investment if I just held).
Dollar cost averaging could be a great way to pick up some great shares/investments on the cheap, if you really believe in a company/investment. Also it encourages people to really understand their investments,( which is always a good thing) because it’s a lot harder to be bullish, when an investment is sinking. But if you can hang in there and dollar cost average, then you could see the benefits of having a lower cost basis.
DISCLAIMER: This is not business or financial advice. The post is strictly in my opinion. Any business or financial decisions should be made with the input of a consultant or business/financial advisory professional.