It’s natural to worry about your investments in a market correction. One day, you’ve got a lot of money and the next day, not so much. It can make you think you should sell quickly to staunch the bleeding or bet big in the hopes of making a fortune when stock prices begin to climb again. But both of those strategies can cost you a lot of money if you time them wrong.
There’s a better approach — one that doesn’t require lucky timing or great investing skill. Even beginners can use it to make themselves a handsome profit.
Slow and steady wins the race
When you’re investing for the long term, day-to-day fluctuations in price don’t mean a whole lot. So rather than basing your investing decisions on them, try dollar-cost averaging instead. That’s where you invest a predetermined sum of money according to a predictable schedule. That might be $100 every week or $500 every month. You decide what works for you.
Dollar-cost averaging has a few key benefits. First, it automates investing, so you don’t have to remember to manually add funds to your account. That can also help you avoid focusing on the daily price swings.
Second, it helps you get a fair price for all your shares. Sometimes, you’ll buy when prices are high and you won’t be able to buy as many shares at once. But that’s balanced out by the times you buy when prices are low and you’re able to get more shares for your money.
Let’s say you want to invest $500 in a certain stock every month. The first month, it’s worth $10 a share and you get 50 shares. The following month, it’s $15 a share, so you only get 33 shares. But the month after, it drops to $8 and you’re able to snag 62 shares. That leaves you with 145 shares you bought for an average price of $10.28 per share.
It’s not a magic formula
Dollar-cost averaging is a great way for a lot of people, especially beginners, to start investing their money. In fact, if you have a 401(k) through your job, you’re already investing this way. But dollar-cost averaging alone can’t make you a fortune.
If you bet on the wrong stock, it isn’t going to matter how much you invest or what price you get. You still have to do your research and choose good companies to invest in. Don’t try to guess what the next big thing is. Focus on investing in established companies that you’re familiar with, at least while you’re new to investing. After you’ve built up a diverse portfolio and you have a little more investing experience under your belt, you can branch out into other things.
You’re not going to get rich overnight with dollar-cost averaging. It’s a strategy that requires time and patience. But in the long run, it can produce good results if you’re willing to wait it out.
Your 401(k) or other workplace retirement plan is a good place to get started if you don’t have a taxable brokerage account. You could also open an IRA if you don’t have a retirement account through your employer. Both of these are great ways to set aside money for your future and save on taxes in the process. A taxable brokerage account could be a better option if you don’t want your money tied up until retirement, though.
Whichever account you go with, make sure it gives you access to the investments you’re interested in and try to set up automatic contributions so you don’t have to remember to make them on your own. As your income changes, see if you can up your contributions so you can grow your money even faster.
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