The Simple Investing Strategy Anyone Can Use
When it comes to investing, it’s far too risky to dive in without any plan. Don’t let this scare you away from building wealth in the market with your hard-earned money. Instead, consider a simple strategy called “dollar-cost averaging” that minimizes risk and makes investing over the long term as easy as paying your cable bills.
What Is Dollar-Cost Averaging?
Dollar-cost averaging is an investment strategy where an individual consistently purchases investments at regular intervals with fixed dollar amounts, regardless of the purchase price. Put another way, you’re consistently buying investments just like you consistently pay your utility bills each month.
This strategy means you will purchase more shares if the price decreases and fewer shares if the price increases. By doing this, dollar-cost averaging lets you own an average price over time. This means you’re relying on time in the market, not the impossible strategy of “timing the market.”
Perhaps one of the most appealing advantages to dollar-cost averaging is its accessibility. You don’t need to have a windfall of money to get started with this investment strategy. Instead, you need to regularly budget for a portion of your income to go towards investments each month. As your income increases so too could the amount you choose to invest. The key is to keep at it on a planned interval.
How Does Dollar-Cost Averaging Compare to Other Strategies?
Typically, investment strategies recommend that investors ‘buy low, sell high’. In theory, this is a great idea. But in reality, it’s almost impossible to know when to buy or sell. It’s a guessing game that requires you to try to time and predict the short term market which can be very volatile.
The uncertainty of a volatile market in the short term might make your palms sweat- and for good reason. It’s risky and the idea of losing money you worked hard for keeps many investors waiting on the sidelines until they feel that prices are low enough to buy. More often than not, the result is missing out on returns and stunting long term wealth building.
Dollar-cost averaging removes investing anxiety. It relies on the overall long term trend of the market going up and removes emotional decision making based on unreliable short term trends. The dollar-cost averaging investing strategy far outshines trying to time the market. Instead, it banks on consistency over regular time intervals to take out variations in the price and provide an average price across a longer period.
A Real-World Example of Dollar-Cost Averaging
Let’s take a look at what dollar-cost averaging might look like compared to sticking your money in a savings account.
Let’s say you were to save $40 per month over 10 years. By the end of 10 years, if you kept the cash in a jar, you would accumulate $4800. If this cash was put into a savings account with an interest rate of 0.25%, this would have grown to $4900.93.
Now, let’s see what that cash can do if you use dollar-cost averaging as your investing strategy. Instead of saving $40 per month, you make contributions of $40 a month into an S&P 500 Index Fund and assume the average annual return of 8%. At the end of 10 years, your cash would have grown to $6886. You would potentially realize $1985.07 in returns compared to keeping cash in a savings account.
The numbers speak for themselves.
Why Dollar-Cost Averaging Works
Dollar-cost averaging takes the emotion and anxiety out of investing. By committing to investing a fixed dollar amount regularly, you don’t need to worry about whether prices are too high or low. Instead, you’re optimizing your potential for building wealth by putting your money to work for a maximum amount of time.
Most investment strategies require complex research, great timing, and luck – which aren’t really actionable. Dollar-cost averaging is actionable and everyone can do it no matter how much money they have to invest.
What You Should Know Before Jumping Into Any Investment
You should know that investing is a risk regardless of which strategy you choose to implement. Before investing, it is important to consider your personal circumstances and risk appetite. That said, dollar-cost averaging is a strategy that reduces your risk and works to build wealth over time.
This strategy is best for those who want to invest in stocks, ETFs, Index funds, or Mutual funds which can be volatile in the short term but provide higher returns in the long term.
Dollar-cost averaging is not a set and forget it strategy. You should still check in periodically as a practice, but don’t plan on pulling money out of the market too soon. Remember, to build wealth, you’re in it for the long haul with this investing strategy.
How to Start Dollar-Cost Averaging Today
Finch can help you grow your wealth and put your money to work using the dollar-cost averaging strategy.
Finch is an all-in-one investing and checking account, which lets you earn investment returns directly on your checking balance. As you deposit your money into your Finch account, we automatically invest your balance into a portfolio that is tailored to your unique risk profile. This means your checking balance is always working you – from day one – no matter what your balance is. Finch further pushes the envelope by enabling you to instantly access your money when you need it – even the invested part!
By consistently making deposits into your Finch account, you are automatically dollar-cost averaging!