Benefits of dollar-cost averaging
There's an investment approach that may help you withstand today's choppy markets and improve your odds of long-term success. It's called dollar-cost averaging, and it’s based on a simple strategy of regular investing over time.
How dollar-cost averaging works
When you invest a predetermined amount each pay period in your employer's retirement plan (or any other savings vehicle), you’re dollar-cost averaging. Instead of focusing on swings in the market, you just keep contributing the same amount each month.
Since market prices fluctuate, this strategy lets you buy more shares when the price is down but fewer shares when the price goes up. The approach has several benefits.
You may do better than those trying to time the market
The majority of investors who wait until prices are “just right” before buying often miss the mark. Over the long-term—5 years or more—you could pay less on average for your shares than if you had tried to pick low points to buy.
You can benefit from compounding earnings
Every month you skip investing, you can miss out on the potential growth of that money. The amounts may be small over the short term, but over time, those missed opportunities can add up to lower returns.
Compound returns—“interest on interest” as the bankers call it—are often what separate successful investors from mediocre performers.
More time to focus on planning for your retirement
Dollar-cost averaging can be an easier approach to investing. With this approach, you have a plan in place to invest over time and are not as concerned with trying to predict which way the stock market will go next month. In fact, other than a periodic portfolio review, you can focus more of your attention on planning for your retirement.
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