Avoid Market Volatility with Dollar-Cost Averaging

Written by on June 12, 2012 in Money - No comments | Print this page


Balance Func Protects From Market Volatiltiy

Use Dollar-Cost Averaging to Protect Yourself From Market Volatilty and Build a Balanced Fund

Stocks go up, stocks go down, stocks go up, stocks go down.  Some people try to time the market, those people are either very, very good at stock analysis or those people end up flat broke.  Market volatility will wipe out the majority of traders that try to play the buy and sell game. For most investors it is better to simply invest in a few quality companies and let their money grow. Worrying about short term swings will only lead to mistakes.

Dollar-Cost Averaging is a way to balance out the highs and lows so that the investment cost is the average over a period of time.  This insulates an investor from short term swings and lets them focus on the long term health of the company they want to invest in.

Dollar-Cost Averaging is the purchasing of the same dollar amount of shares, in a single company, at regular repeated intervals.  That is a person dollar-cost averaging shares of IBM may purchase $200 worth of stock at the end of every month.  This is done with out regard for the price of the stock.  If the price is high, the $200 buys less shares.  If the price is low, it buys more.

A person dollar-cost averaging should never try to play the market.  If they are doing it correctly they develop a schedule and stick to it regardless of the volatility in the market.  The point of this strategy is to let repeated purchases find an average value with the knowledge that over a long time period that average will rise.

This is a great way for a small investor to develop a growing stake in a company.

The biggest drawback of this stratagey is the commission cost that is associated with purchasing stock.  By making many small purchases an investor paying high commissions will quickly lose more than they gain.  Fortunately there are new investment systems that avoid the broker entirely.  DRIPs (Dividend Reinvestment Plans) and DRPs (Direct Purchase Plans) are great new investment tools; both enable the small individual investor to buy stocks directly from the issuing company.
For those that want to enter the stock market in a smart way with a long term focus of building real wealth then dollar-cost averaging is a great approach to take. Avoid market volatility while building ownership in a reputable company, that is being a smart investor.


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About the Author

Matt Brand

Matt Brand is QLR's money saving expert. His experience with credit cards and student loans have made him take a strong interest in personal finance, saving money and sharing his knowledge. He is passionate about teaching others how to avoid the trap and make smart financial decisions. View all posts by Matt Brand.