Everything you need to know about dollar-cost averaging

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.

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.

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.

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.

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.”

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.