A Great Place to Start

Dollar Cost Averaging: Smoothing out the Peaks and Valleys of Investing

Friday, April 5, 2024

As anyone over the age of 10 years old can attest, the trajectory of your life is rarely, if ever, a straight line. Rather, it’s marked with peaks and valleys; good days and bad days; wonderful seasons and challenging ones.

Finance can operate in much the same way. Bull markets and bear markets; low interest rates and high interest rates; getting a bonus and having your A/C go out.

As much as we might like to, we can never truly get rid of these peaks and valleys. However, there are several things that can be done as investors to help to smooth them out a little and ensure that we are heading in the right direction financially speaking. Perhaps the most important of those things, is being consistent in our saving and investing.

Historically, investors are rewarded for patience and consistency.

Investing is a long term proposition, and historically, investors are rewarded for patience and consistency. deVere Group CEO Nigel Green put it best when he said, “If you go to the gym, you can’t just do one big workout; it’s not going to make a difference. You’re going to get sore, and that’s about all it’s going to achieve. You’re not fit for life with one big workout. Well, the same thing when it comes to investing. You need to be consistent and ideally talk to a financial advisor or save regularly. Be consistent”

One of the tools in the toolbox of a consistent investor, is Dollar Cost Averaging (DCA). Dollar Cost Averaging is the practice of investing a fixed dollar amount at regular intervals regardless of share prices or volatility in the market.

The main benefit of Dollar Cost Averaging is that it helps mintage the risk of bad market timing.

Below are two graphs showing $600 invested into the market. The first, using Dollar Cost Averaging and the second just investing the entire sum of money all at once (Lump Sum Investing).

*Charts courtesy of Fortune Magazine

As you can see, by Dollar Cost Averaging the money into the market, the person got a better share price and was able to purchase more shares. Whereas the person who invested in a lump sum had poor market timing and owns less shares because of it.

Dollar Cost Averaging can be particularly important at the beginning of your investment journey. It turns investing into a habit, takes the emotion out of investing and you can start relatively small when it comes to the amounts you invest. I know many young investors who started with a “contribute what you can” approach. That may only be $100 a month, but its a great place start!

Dollar Cost Averaging helps mitigate some of the risks of trying to time the market.

In addition to consistent investing, another great way to smooth out the peaks and valleys of investing is having a dedicated team of financial professionals at your side; people who can act as a guide to help you achieve your financial goals and have a healthy financial future. If you know anyone who might have questions about their finances or need help investing, please send them our way! We would love the opportunity to speak with them.

I hope you all have a blessed week,

M. Grant Pannell

(The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.)

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.