5 Things to Know About Dollar Cost Averaging
All of our investment strategies at Marshall Financial Group revolve around creating a plan for clients that is aligned with their financial goals and risk tolerance. One way to reduce risk, create a long-term plan for investing, and grow your investments is through the Dollar Cost Averaging strategy. Although you may already be familiar with the concept (and not even know it), here are five things to know about the DCA wealth management strategy.
What is the DCA strategy?
The basic strategy of DCA investments is to spread out investments over time, instead of making a lump investment all at once. For example, instead of investing $24,000 into an individual account on January 1st, you would contribute $2,000 a month into that account.
Investment over time accounts for volatility and can reduce risk.
When you buy into the market at different points, it reduces the impact of trying to time the market. This focuses on the average prices over time, rather than the specific price at a fixed point in time. For example, if you invest all $24,000 dollars at one time and the market has a correction, you could lose more than if you spread that investment out over time. By continually contributing to the investment account, you are buying more shares when the market is low and less shares when the market is high assuming you keep investing the same dollar amount.
It can help you manage emotional investing.
We are financial professionals and not mental health professionals, but the DCA strategy can help with the psychology of investing. For one, you may feel a little more secure when you invest a bit at a time, rather than investing a large lump sum into the market. Furthermore, you don’t stop the strategy when the markets dip. This means that you are not tempted to sell and buy for short-term outlooks. Investing in your goals is about looking at long-term performance, and how your investments fit with your life goals overall.
You might already have a DCA strategy in your portfolio.
One of the best examples of a DCA investment is a 401(k). You have the amount of money you and your employer are contributing, and that amount is the same relative to your salary every month. No matter where the market is, you are still making that contribution. You have also already selected the funds that you are investing in. The DCA approach works with any investment account, including any individual account or IRA. For many people, this makes investing less complicated with a set strategy.
A DCA strategy doesn’t mean set it and forget it.
Although the DCA strategy might sound like you are just investing money into an account every month and hopefully letting it grow, like any investment it needs periodic reevaluation. The DCA strategy is like a roadmap. You know the amount of money you have committed to and where it is going within your investment portfolio. But, like a map, sometimes you need to stop, look around, and make sure you are going in the right direction. Although the DCA strategy helps account for fluctuations in the market, over time you should re-evaluate the amount of money you are investing and make adjustments as needed, even with a 401(k).
As part of our commitment to our clients, we discuss what your goals are and how your investments can help you achieve those goals. For some people, a DCA strategy provides a great, lower-risk option.
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