Is Dollar-Cost Averaging Worth It?
Dollar-cost averaging is an investment strategy that can really save your neck in the right circumstances. But it’s a strategy that I avoid when I can. Today I’ll go over what dollar-cost averaging is, why it works, and why it (usually) isn’t right for me.
What is Dollar-Cost Averaging?
Even though I think the stock market is a great place to invest, it has a pretty big weakness: Volatility. It goes up and it goes down. Sometimes the swings can be jarring. And as bad as the market as a whole is, individual stocks are worse.
One area where the market’s volatility can work against you is when prices fall right after you invest a large amount. Let’s consider an example. Imagine you have $5,000 to invest and you buy into an index fund at $100 per share. But next month, the price drops to $70 a share:
In this example, your investment has quickly lost $1,500. It’s not quite as bad as it looks, the loss is only a “paper loss.” In other words, you only actually lose money if you sell. The deeper problem is the opportunity cost. Take a look at those 50 shares that you probably glossed over in the last table. Then compare that to what would have happened if you had invested in month two:
If you had just waited a month, you could have had more than 70 shares instead of 50…
