I was never a big fan of dollar cost averaging. It always seemed like being an active investor would yield the best results. Seeing the results of the one investment that I was using dollar cost averaging for has caused me to reconsider my thinking.
For those that don’t know, dollar cost averaging is periodically investing in something regardless of its current price. For instance, you might invest $1000 a month in a certain stock regardless of it’s current price. Depending on the price, you’d get more or less shares. The method works well for two reasons: You load up on shares when the price is beaten down and you largely take yourself out of the equation.
The second point is the one which helped me the most. Using dollar cost averaging I can passively implement my investment strategy. There’s still investment decisions to be made, since I have to choose the companies to invest in, but the temptation of trying to time the market is removed.
Like I said, I wasn’t sold on the idea until I actually tried it. By automating my investments I was able to build up sizable positions in good companies. When the stocks where tanking I was excited to be able to afford more shares. When the prices came back up, I had a lower cost basis and enjoyed the accompanying gains.
If you’d like an automated an easy way to use dollar cost averaging, you can invest directly with companies that offer dividend reinvestment plans (DRIPs) or use a site like Sharebuilder.
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