History supports the fact that’ periods of markets tranquility would inevitably end at some point. Recent financial crisis can be analyzed as lenders have become complacent and gradually overconfident, and the profit motives increasingly pushed aside the fear of losses and this has happened during the period of relative stability. This suddenly changed the investor sentiment, as many investors offload and even taking positions that are based more on their perceptions of herd behavior (e.g., selling an asset in anticipation of a panic) than underlying fundamentals.Every investor or trader dreams of buying into the market at a lower level, just before any upward trend, and garnering a handsome profit from selling at the higher level. But attempting to predict the market direction merely on intuition can get you in lot of trouble. Simply it’s impossible to predict market peak or bottom. One strategy that can surely help investors to avoid investing pitfalls and also without much effort, is ‘Dollar-cost averaging’.
Dollar cost averaging is the simplest investment strategy for the general investors, this involve investing a constant sum of money in the specific common stocks over a longer period, regardless of the changing levels of stock prices. Some investment advisers call dollar cost averaging the unbeatable formula. Let’s say you have $10,000 to invest, rather than investing all at once, you decide to contribute $500 each month in particular security, regardless of its price, until your money is completely invested. You would end up purchasing more shares when prices are low and less shares when prices are high. For example, you might end up buying 100 shares when the price is low, but only 50 when the price is higher but the steady accumulation of stocks proceed at regular intervals.
Basically, Dollar-cost averaging is the investing discipline help investors to overcome the risks of emotional purchase and sale decisions, buying shares when the markets trading too high and liquidating shares when the market goes too low. I preferably emphasize averaging advantage in relation to protection of an investor who tends to pull out of the market in momentary sharp decline, potentially causing an inappropriate loss in panic situation.
Dollar-cost averaging also helps you to avoid the difficulty and stress of continually monitoring the market moves in an attempt to buy and sell at favorable moments. Dollar-cost averaging is a long-term investment program and requires steady flow of funds for investment, irrespective of the time when you begin investing.
While selecting investment portfolio you can decrease your risk exposure further by diversifying your portfolio with purchasing stocks that have lower fluctuations or volatility. The apt use of this strategy comes only when you have stuck with it for a while, irrespective of negative swings in the market. When other investors book losses to get out of the market because of the steep falls, to get back into it when the market has risen, you’ll keep investing a specific amount based on the time interval you’ve set.
The few limitations of a dollar cost averaging strategy include investor attempting to time the market by delaying purchases in declining markets or when the market appears high, or by diverting the specific funds to other uses. Further investor should not end the investing program during an extended phase of market decline. Dollar-cost averaging does not ascertain the profit or protect against a loss in declining markets. Dollar cost averaging does not suit all the investment needs, like it does not work for traders or for the lump sum investment.
In conclusion, Dollar-cost averaging is a systematic approach of investing that allows investor to benefit from stock markets price fluctuations over time while reducing unfavorable emotional decisions. Also this ‘easy to follow’ strategy is suitable for average investors with long-term investments objective and help to decrease their risks, and probably increase their rate of return.
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