Investors are always asking themselves the same question: Is now a good time to invest? Given the turmoil and uncertainty of the markets and the economy over the recent months, and the subsequent decline in asset values, many think there are some very compelling investment opportunities now.
But is now a good time? Might asset values go lower? All are good questions, but what if there was a strategy that could work in either instance? What if there was a strategy in which you could take advantage of these seemingly low valuations, but also not be fully exposed if asset values do decline even further?
The good news is that there is such a strategy. It is called dollar cost averaging.
If interested in achieving long-term growth of capital or if you think these values are too compelling to pass up, but are afraid to commit too much money in case the market declines even further, dollar cost averaging just might be the right strategy. As many investors have discovered, an undisciplined approach to investing can make portfolios overly sensitive to shifts in market value. The idea behind dollar cost averaging is simple. Instead of trying to time market highs and lows, the investor regularly invests a reasonable amount of money in a simple investment vehicle over a long period of time.
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Such strategy attempts to take market ups and downs out of consideration and turns them to your advantage through discipline. Since the focus of dollar cost averaging is long-term, investors should not be overly concerned whether prevailing market conditions are strong or weak when they begin to invest. What matters is that they choose a realistic program based on their individual financial situation, start and stick with it. The ability to stick with the original plan regardless of changes in market conditions is the key to success in dollar cost averaging, and investors should consider their ability to continue investing during periods of low prices. A profit is not guaranteed and dollar cost averaging won’t protect against a loss in declining markets. However, following a dollar cost averaging plan may help avoid getting out of the market when it’s low and rushing in when it’s high. Be sure to check with your financial adviser about whether dollar cost averaging can help give you a discipline for success in the financial markets.