Wealth management entails a suite of savings and investment strategies that your manager can advise you to build and manage your wealth. One of these investment strategies is dollar cost averaging. Dollar cost averaging is the use of investment funds split over a regular interval to buy stocks, securities, or assets over a certain period rather than using all the funds immediately.
Discover five advantages you can gain from dollar cost averaging (DCA).
1. Reduces Investment Risk
Every market goes through a cycle where the price of the security or asset is high due to market sentiment. Alternatively, the market can also crash and cause the price of these securities and assets to face a prolonged downturn. Lump sum investments during market sentiment and before downturns will increase your entry price and reduce the number of securities you can acquire.
Since DCA provides a way to purchase securities during high-priced and low-priced market conditions, you can spread your risk and ensure you average your entry price. Therefore, you reduce your investment risk when the market corrects its intrinsic price. You also increase the amount of securities or assets you earn for lower prices during a downtrend.
2. Manages Emotional Investing
Markets depend on market sentiment as one of the components to fairly price the cost of securities. Therefore, investors might fall into the trap of emotional investment. Wild price swings might influence how you interact with the securities and assets you want to acquire and own. However, DCA eliminates emotions from investment.
Rather than rely on market sentiment, you can develop a mechanical approach to investment. DCA generates a technical investment strategy that utilizes periodical investment. Therefore, you can keep buying securities even when the markets fall and develop an equal selling strategy when the markets pump.
3. Encourages Disciplined Saving
Regular additions to your portfolio can encourage you to have a disciplined savings regimen. Even during bad market conditions, your position size will increase even as your position value decreases. This approach is especially useful for people with 401k plans. Therefore, anyone can invest even if they do not have a lump sum amount to enter the market immediately.
4. Reduces Costs During Market Downturns
One of the downsides of DCA is the amount of fees you pay for every transaction. However, this disadvantage turns into a benefit during market downturns. You acquire assets with bargain prices if the market falls, which can help you offset the fees you incur for every purchase. Therefore, a DCA strategy can help you leverage bad market conditions to increase your position size and offset the cost of fees.
5. Prevents Bad Timing
Arguably, no one can time the market correctly. You might get lucky sometimes and invest your entire account just when the market starts an uptrend. However, you might also be unlucky or emotional and judge that an uptrend will continue. For example, imagine if you invested before the 2007 market crash. You might have lost a significant amount of your investment in that crash.
In both instances, you only rely on luck and hope that your initial investment will bring massive returns. However, this strategy is unreliable and does not constitute wise investment behavior. You should not rely on a haphazard strategy that measures your luck. Instead, a DCA strategy will help you average out any market downturns should you start your journey just before a market downtrend.
An investment manager can help you maximize the benefits of a DCA strategy. Since investment managers understand the markets and can reliably examine general market sentiment, they can ensure your investment capital purchases worthwhile securities. Therefore, involve a wealth manager who can advise you on how to proceed with your investment journey.
Contact us at Presidio Wealth Management for financial advice on your wealth today.