Everything you need to know about dollar-cost averaging

Select’s editorial team works independently to review financial products and write articles that we think our readers will find useful. We earn commissions from affiliate partners on many offers, but not all offers on Select are from affiliate partners.

If you have contribute money to a 401(k) retirement accounts, you may not have realized, but you are practicing a popular investment strategy called dollar-cost averaging.

Simply put, this approach means that you are investing a fixed, equal amount on a regular basis, such as monthly or biweekly, instead of investing all your cash at once. simultaneous.

For example, with a defined 401(k) contribution plan, you’re investing as you earn, regularly taking money from each paycheck throughout the year and putting it in the market. Dollar cost averaging can also be the same as if you decided to invest $5,000 of your savings by dividing that cash into five parts, where $1,000 is invested each month of the year. month.

Subscribe to Selective Newsletter!

Our best picks in your inbox. Shopping recommendations that improve your life, offered weekly. Sign up here.

Here’s what to know about dollar-cost averaging

Dollar cost averaging allows you to spread your investments and buy into the market at different times at different prices. In turn, these bids balance each other out ideally, which is where the “average” part of the phrase comes from.

Experts often recommend this long-term investing approach (especially with widely tracked index funds) for those with a low risk appetite because of the continuous cash contribution over time. reduce the impact of any Market volatility on an investment. Not to mention, it allows investors to forget about the ups and downs of the market because their contributions are not affected by what is happening; they are contributing steadily no matter what. This helps to leave emotion-based investing off the table.

Average dollar cost vs one-time investment

Dollar cost averaging is often compared to its antithesis, aggregate investing, an inverse approach, otherwise known simply as market timing.

Like dollar cost averaging, a one-time investment can also help you build wealth – and even better, maximize your profit – although with the caveat that you are taking on more risk. After all, as we all know, no one can really time the market.

When investing a large amount of cash into the market at once, your money will work immediately. However, with dollar-cost averaging, only some of your money is put into the market to begin with and the rest is earmarked for future contributions – this can allow you to hold onto your own money. catch future declines in the market, but your immediate profits may be smaller if the market takes off earlier than expected.

Is dollar cost averaging right for you?

When investing with any method or strategy, the first step is to identify potential returns as well as take risks.

While you can get better returns over time with a one-time investment, it is not a good idea for those looking to reduce their short-term downside risk because of the potential larger losses.

Risk-averse investors, or those worried about market volatility, are better off using the dollar-cost averaging approach. A good place to start is with the S&P 500 index fund showed an average annual return approximately 10% since 1957.

For example, Charles Schwab’s S&P 500 Index Fund is a simple option with minimal investment. Its expense ratio is 0.02%, which means every $10,000 invested costs $2 annually – index funds typically have a 0.2% expense ratio, so this is very low.

Charles Schwab

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle chosen. There is no minimum account to invest actively through Schwab One® Brokerage account. Automated investing through Schwab . Smart Portfolio® requires a minimum deposit of $5,000

  • Fee

    Fees may vary depending on the chosen investment vehicle. Schwab One® Broker account with no account fees, $0 commission on stocks and ETFs, $0 transaction fee on over 4,000 mutual funds, and $0.65 fee per options contract

  • Bonus

  • Investment vehicle

    Robot advisor: Schwab . Smart Portfolio® and Schwab Intelligent Portfolios Premium™ IRAs: Charles Schwab IRA Traditional, Roth, Transferable, Inheritance and Custodian; plus an Individual Choice Retirement Account® (PCRA) Brokers and transactions: Schwab One® Broker Account, Broker Account + Dedicated Platform and Trading Support, Schwab™ Global Account and Schwab Institutional Account

  • Investment options

    Stocks, bonds, mutual funds, CDs and ETFs

  • Methods of education

    Extensive retirement planning tools

For an option with no expense ratio, consider Honest ZERO® Large-cap index funds. While the fund technically doesn’t track the S&P 500, the Fidelity US Large Cap Index tracks large-cap stocks, website says“regarded as shares of the 500 largest US companies.”

Honest Investment

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle chosen. There is no minimum amount to open a Fidelity Go account, but the minimum balance is $10 for the robot advisor to start investing. $25,000 Minimum Balance for Honest Personalized Planning & Consulting

  • Fee

    Fees may vary depending on the chosen investment vehicle. Zero commission on stocks, ETFs, options and some mutual funds; no transaction fees for more than 3,400 mutual funds; $0.65 per option contract. Fidelity Go is free for balances under $10,000 (after, $3 per month for balances between $10,000 and $49,999; 0.35% for balances over $50,000). Fidelity Personalized Planning & Consulting has a 0.50% consulting fee

  • Bonus

  • Investment vehicle

    Robot advisor: Fidelity Go® and Fidelity® Personalized Planning & Consulting IRAs: Honest Invest Traditional, Roth, and Rollover IRAs Brokers and transactions: Honest Investment Transactions Other: Fidelity Investments 529 College savings; Fidelity HSA®

  • Investment options

    Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares

  • Methods of education

    Extensive tools and in-depth, industry-leading research from over 20 independent vendors

You can also consider investing a fixed amount monthly through robo advisor alike Improvethis will create a custom portfolio of ETF (similar to an index fund) to you based on your risk tolerance and investment capabilities.


On Betterment’s secure site

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle chosen. For Better Digital Investments, minimum balance $0; Special investments require a minimum balance of $100,000

  • Fee

    Fees may vary depending on the chosen investment vehicle. For Better Digital Investments, 0.25% of your fund balance as an annual account fee; Premium investments have a 0.40% annual fee

  • Bonus

    Up to one year of free management service with a qualifying deposit within 45 days of registration. Valid only for new personal investment accounts with Betterment LLC

  • Investment vehicle

  • Investment options

    Stocks, Bonds, ETFs and Cash

  • Methods of education

    Betterment RetireGuide™ helps users with retirement planning

Editing notes: The opinions, analysis, evaluation or recommendations presented in this article are the sole opinions of the Select editor and have not been reviewed, approved or endorsed by any third party.

Source link


News7g: Update the world's latest breaking news online of the day, breaking news, politics, society today, international mainstream news .Updated news 24/7: Entertainment, the World everyday world. Hot news, images, video clips that are updated quickly and reliably

Related Articles

Back to top button