Everyone knows the market goes up and down.
A common adage is to “buy low and sell high.” Trouble is, it’s next to impossible to know exactly what the market will do in the near future. What’s more, most individuals don’t have the discipline or courage to try to time the market, says John Markese, vice chairman of the American Association of Individual Investors.
“People who watch the market tend to put money in when it goes up and never put it in when it goes down. Or if the market’s gone up, they’re afraid they’ve missed it and they don’t do anything,” says Markese.
That’s where dollar-cost averaging comes in.
It’s a technique whereby you invest a set amount of money on a systematic schedule over the long haul regardless of how the market is performing. Because you’ve put your investing on autopilot, you’ll end up with more shares for your money when the market is down. But if stock prices rise, you wind up with fewer shares.
“It’s a discipline that reduces risk, not something to get rich quick,” says Markese. “And that’s the whole point. It gets you started. Don’t worry about where the market is. Start and put money in on a regular basis, let’s say every month. It’s easy to do.”
In fact, if you’re enrolled in a workplace retirement plan where earnings are automatically taken from your paycheck, then you’re already dollar-cost averaging. But you can adopt this strategy outside your employer’s plan by arranging for funds to be invested in other types of retirement accounts on a regular basis.