Investors who have spent some time building their investment portfolio may have heard a dollar-cost averaging technique. Some investors doubt the ability of this technique to reduce market risks. However, many investors have agreed that this technique can help them to better withstand the emotional dangers of panic and overconfidence during extreme stock market volatility.
It helps remove emotions out of the challenge to allocate investors’ capital.
The Definition
Dollar-cost averaging focuses on building systematic investing with a fixed amount of currency or gaining a fixed number of shares units. The technique requires predetermined intervals to build a position in security slowly.
With this technique, investors slowly buy smaller amounts of assets over a longer period of time. That way the cost basis is spread out over several years at different prices.
In other words, during the rapidly rising prices, investors will have a higher cost basis compared to when the stock prices collapse.
Things to prepare
Before investors begin planning a dollar-cost average, there are three things that they need to prepare.
The amount of money
The first thing to be prepared is the amount of money that he or she wants to invest every month. It is important to ensure that the amount committed is affordable and financially prudent. Thus, the amount invested each month remains consistent for the length of the time.
If an investor fails to keep that commitment, then the plan will not be effective.
The type of investment
After the amount of money, now the investor has to decide the investment he or she wants to have. The investor needs to hold this investment in the long term, defined as at least five to ten years long.
The interval
The regular interval for the money invested in the investors’ security with this technique can be weekly, monthly, or quarterly.
When the broker offers it, then the investor can even set up the withdrawal plan automatically. That way, the process becomes automated, thus, the investors can pay a lesser amount of money.
