Have you ever felt that investing is complicated, overwhelming, and scary? If so, you’re in the right place. One of the most common questions we get asked is, “Is it a good time to invest?” Nobody wants to miss out on the chance to purchase hot stocks, but of course, there’s always the chance that if you wait just a bit longer, you’ll be able to buy at a lower price. What if you wait too long? What if you don’t wait long enough? What if all of the nail-biting and FOMO (Fear Of Missing Out) doesn’t pan out, and your portfolio ends up losing money?
There’s good news. Thanks to a smart investment strategy called dollar-cost averaging, you can minimize the stress and guesswork of saving.
Navigating Market Risk
How do you know when to invest? You don’t. The simple fact is that the market is impacted by unpredictable factors, which makes it impossible to consistently and successfully time the market. From politics to pandemics, numerous unknowable factors can cause a stock to rise or fall at the drop of a hat, which means you would need to be extremely lucky to buy and sell at the right times to make a profit.
If short-term trading in the stock market is that risky, why bother? While all investments carry risk, trying to time the market significantly amplifies it. To meet your long-term goals, you are better off treating the market as a long-term investment requiring a long-term mindset. Historically, the market has generally gone up over time. Of course, that doesn’t mean there won’t be market highs and lows along the way. This means that protecting yourself from emotionally charged financial decisions and giving your investments enough time to navigate the highs and lows are crucial strategies that can help minimize investment risk.
What is Dollar-Cost Averaging?
Dollar-cost averaging is a proven investment strategy that helps reduce risk when paired with a long-term approach. By making regular, equal-dollar, automated investments, regardless of the market state, you can average a lower cost-per-share. By sticking to a set investment amount and schedule, over time you’ll reduce the number of higher-priced shares purchased when the market is up, and increase the number of lower-priced shares purchased when the market is down. While dollar-cost averaging doesn’t guarantee a profit or protection from a loss, it can help market fluctuation work for your portfolio.
One of the most important benefits of dollar-cost averaging is that it takes the emotion out of investing while building or reinforcing healthy wealth-building habits. Making regular contributions to your retirement savings is key to reaping the benefits of compounding–a smart financial strategy that you can learn more about here. By making regular investments regardless of the market state, you can focus less on the headlines and more on the big picture. Depending on how close you are to retirement, the market could have several ups and downs before you get there, so it’s wise to focus on your goals rather than temporary circumstances.
How to Incorporate Dollar-Cost Averaging
It’s easy to save smarter with dollar-cost averaging, and even easier when you automate it. Using auto-transfers to handle these investments can further take the emotions out of investing since it’s no longer something you have to stop and think about doing.
Talk to your employer’s HR department about setting up an automatic payroll withdrawal to your 401(k). Alternatively, you could schedule a recurring transfer from your bank account to your investment account. This recurring investment could be weekly, bi-monthly, or even monthly. How much you decide to transfer depends on your big-picture financial goals, and should take a holistic strategy into account, but if you can, it’s wise to maximize your annual contribution limit. Learn more about saving for retirement, or what we call Bucket #3, here.
Getting Started
Being Smart About Money™ isn’t about getting in on the action–it’s about pairing informed decisions with healthy habits and a long-term plan. Dollar-cost averaging is a savvy financial strategy that’s simple to execute, as long as you’ve identified how much to invest and which securities best align with your risk tolerance. If you’re not sure where to start, a financial advisor can help. Start the conversation to learn more ways to plan and save smarter so you can Retire To Your Happy Place™.
Material provided, in part, by Kalli Collective, an independent third-party, Raymond James is not affiliated with Kalli Collective.
Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of the strategy selected, including asset allocation and diversification. Past performance is not indicative of future results.
