Your goal as an investor might be to buy stocks at a low and sell them at a high. But some people think that to pull that off, they’ll need to time the market — buy stocks at the perfect moment when they’ve hit a low and sell them when their prices have peaked.
Timing the market is a good strategy in theory. There’s only one problem: Studies have shown time and time again that it just doesn’t work. A better bet? Invest steadily over time using a simple strategy called dollar-cost averaging.
Why dollar-cost averaging is your best bet
With dollar-cost averaging, you pledge to invest a specific sum at predetermined intervals during the year, thereby adding to your portfolio over time. In other words, you might say you’ll invest $200 a month in a broad index fund, or you’ll put $100 a month into a specific tech stock you’re a big fan of.
Dollar-cost averaging works in the context of traditional brokerage accounts as well as retirement plans — specifically 401(k)s, which allow you to have contributions automatically deducted from your paychecks at preset intervals. Some IRAs have an automatic savings feature, too, that allows money to flow directly from your checking account into your retirement account.
So what makes this strategy so effective? Well, a few things.
First, you’re timing the market without actually timing the market. By buying stocks at different prices on a regular basis, you’re more likely to pay a lower average share price than you would by attempting to buy at just the right time. Plus, you’re more likely to avoid losing out on great deals, whereas with market timing, you risk getting so caught up in your quest for the lowest stock price that you miss out on otherwise solid buying opportunities.
Another great thing about dollar-cost averaging is that it takes emotions and fear out of the equation. Deciding when to buy stocks can be a mentally exhausting process, so if you commit to a schedule ahead of time, you won’t have to grapple with that strain throughout the year. Also, many people tend to avoid investing during periods of stock market volatility. But dollar-cost averaging could actually help you benefit from the next stock market crash by helping you stay the course rather than stay away.
A solid long-term approach to investing
Many people who attempt to time the market also adopt the attitude that their best bet is to get in, make a quick buck on stocks, and get out. But that approach often backfires. A better bet is to load up on quality stocks you can hold for decades, and dollar-cost averaging works well with this line of thinking. In fact, there are plenty of good reasons to adopt a dollar-cost-averaging strategy, so if you’ve been spinning your wheels in a futile attempt to time the market, pledge to put an end to that practice — and throw your sanity a lifeline in the process.
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