The stock market's wild gyrations and steep declines have brought new appreciation for an old investing strategy: dollar-cost averaging.
CHICAGO — The stock market’s wild gyrations and steep declines have brought new appreciation for an old investing strategy: dollar-cost averaging.
“This is the best time to be doing it,” says Vita Nelson, editor and publisher of The MoneyPaper, a Mamaroneck, N.Y.-based financial newsletter that has long touted the concept.
Many people are employing the technique even if they don’t know it.
Easing into position
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In dollar-cost averaging, instead of sinking a lump sum into a stock or fund an investor eases into a position by buying smaller amounts at regular intervals — weekly, monthly or quarterly.
That’s done already by most savers who have 401(k)s, 529s and other plans and have set amounts taken regularly out of their paychecks or bank accounts.
The downside of dollar-cost averaging is that it eliminates your chances of buying stocks only at their lowest point. But experts say it still makes good sense.
“It’s difficult to forecast the market, so investors should really think about investing gradually, consistently over time,” said Francis Kinniry, a principal in Vanguard’s investment-strategy group.
How to check its effect
To see how dollar-cost averaging might affect your investment plan in several different market scenarios, visit www.wellsfargoadvantagefunds.com and search for the term “dollar-cost averaging” under its education-tools section.
Here are five points in favor of using dollar-cost averaging:
• Lessens risk
Putting all of your money to work in the market at one time heightens the impact of volatility on your portfolio.
For instance, if you bought stock in the beginning of September when the Standard & Poor’s 500 index already was down a whopping 20 percent from the market peak in October 2007, that turned to have been less than half of the overall market slide.
By spreading out your investments, dollar-cost averaging lessens the risk of investing a large amount at the wrong time.
• Reduces costs
Because more shares are purchased when the stock price declines, the overall cost is lower than it would be if a constant number of shares were bought at set intervals.
This assumes you do it through a plan that doesn’t charge fees for each transaction, as with 401(k)s or plans that allow investors to buy stock directly from companies without fees, as listed at www.directinvesting.com or www.sharebuilder.com.
• Helps in downturns
Buying at a time like this means you buy more shares at lower prices and fewer at higher prices. The additional shares bought at depressed prices will generate bigger gains when the market comes back.
• Removes emotion
It helps you avoid the emotion that accompanies up-and-down swings in the markets.
It also forces you to keep sinking money into equities at times when shares are tumbling and you might not otherwise be inclined to do so.
• Avoids market timing
Adding shares regularly means you are building your position without trying to jump in at exactly the right time, a dicey proposition at best.
“This is money that you’re putting away for the long term,” Nelson says. “It’s a very good way to build wealth.”