It is a common belief that successful investing requires one to always be analyzing the market and knowing when to buy.
Financial news channels are constantly discussing whether the market is about to rise or about to fall. And it's way too easy to find predictions about “the next big stock” on social media. As a result of this constant stream of information, many new investors spend months waiting for the “perfect time” to invest.
The problem is that finding the perfect time to buy is nearly impossible.
Introducing: Dollar Cost Averaging
Dollar-cost averaging is the practice of investing a fixed amount of money at regular intervals, regardless of whether markets are rising or falling. Instead of trying to predict the best day to invest, an individual commits to investing consistently over time. Every major investment platform offers automatic contributions, which makes putting this practice into action very accessible.
When markets are falling, many investors become nervous and stop investing altogether. When markets are rising rapidly, many investors become overconfident and invest more than they originally planned. Dollar-cost averaging helps avoid both extremes by creating a simple rule: invest the same amount on a regular schedule.
A common expression among experienced investors is:
“Time in the market beats timing the market.”
However, dollar-cost averaging isn’t a magic formula that everyone should follow to a tee.
If an investor has a large sum of money available today, investing it all immediately will often produce better results over long periods of time because the money spends more time in the market and is able to compound for longer.
But many people are uncomfortable investing a large amount all at once, especially when the markets are volatile.
For these individuals, dollar-cost averaging can provide peace of mind while still allowing them to participate in long-term market growth.
Building wealth is rarely the result of one perfect investment decision.
It is much more standard to be the result of small, disciplined action repeated over time.