The decision to invest money all at once or gradually comes up while thinking about investing. If you choose the latter option, you may be choosing a method of investing known as dollar-cost averaging. Dollar-cost averaging or SIP allows you to invest your money consistently and in equal amounts, regardless of market fluctuations.
Consider that you had $10,000 in savings or a windfall to invest. Dollar-cost averaging allows you to divide a $10,000 investment into ten $1,000 monthly investments rather than making the entire investment at once.
Without even realizing it, you may already be doing dollar-cost averaging. If you have a 401(k) or similar kind of defined contribution plan, your contributions are distributed on a regular, fixed schedule to one or more investment options, regardless of how the market is performing. You are dollar-cost averaging each time this occurs.
Stock market movement is unpredictable and trying to ‘time the market’ has been proved a futile exercise. One should rather aim to follow the ‘time in the market approach. The longer your money is invested in the stock market or equities, the better the potential to generate higher inflation-adjusted returns.
DCA or systematic investment plan (SIP) suits any investor who has a regular income flow such as salaried individuals. From the income received each month, one may start putting a fixed sum into stocks, ETFs, or mutual funds.
Buy low and sell high remains the best stock market principle but it is never put into practice. If your stock or ETF is fundamentally strong and you want to keep holding it for the long term, then at every dip or correction in prices, it’s better to buy more. DCA approach is the best way forward to apply this in practice.
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Many times, when equities decline, individuals become afraid and sell. They can therefore lose out on possible gains when the market rises again. On the other hand, investors can be enticed to jump in when the stock market increases. However, they might end up making a purchase if markets are going to decline.
Dollar-cost averaging can help investors detach themselves from their emotions. It forces you to keep investing the same amount despite changes in the market, thereby assisting you in resisting the need to time the market.
Buying more shares of an investment when the share price is low and fewer shares when the share price is high is known as dollar-cost averaging. Over time, this may lead to paying a lower average price per share. Dollar-cost averaging can also assist you in limiting your losses in the event that the market collapses by allowing you to invest gradually rather than all at once.