Dollar Cost Averaging and the Importance of Consistency

by Miranda Marquit on March 15, 2013

Many investors are looking for some sort of “secret” that will result in successful investing. Unfortunately, the reality is that most ordinary investors aren’t going to find some magic solution for amazing investment returns.

Instead, if you want to improve your chances of success with investing, you are better off going for consistency. If you are consistent in your investing efforts, and use dollar cost averaging as part of your long term plan, you have a better chance of building wealth in the long term.

Dollar Cost Averaging

Many investors don’t have large amounts of capital to get started. However, you don’t need a lot of capital to start investing. With the way investing is done today, you can buy portions of shares. That means that if a share costs $50, and you have $75, you can buy 1.5 shares.

investing strategy

Dollar cost averaging takes advantage of this reality, and allows you to consistently and easily invest and grow your wealth.

The key to dollar cost averaging is regularly investing the same amount of money. You decide how much you can invest each month, and then buy as many shares as you can in a particular investment. Your best results come from setting up an automatic investment plan with your brokerage so that money is automatically taken out of your account each month.

As you invest, you get stocks for the going value. When stocks are down, your dollar buys more shares, which can be beneficial as stocks generally gain in value over time. As stocks rise in price, you continue to buy them at today’s prices. In the future, when you are ready to sell, you will have amassed more shares — and they are likely to be worth more.

Consistency is Important

In order for dollar cost averaging to work, though, you need to be consistent. You need to invest regularly for a long period of time. It’s vital that you keep putting money toward your investing goals, because, over time, that’s likely to have more of an impact on your overall portfolio.

Indeed, investing consistently over time is one of the best ways to build a nest egg. Combine consistency in investing with proper asset allocation, and you have an increased chance of success.

What Should You Invest In?

Once you have decided that you want to invest consistently, and use dollar cost averaging in your efforts, it’s time to figure out what you should invest in. There are some investments that are particularly well-suited to consistent investment through the years:

  • Index funds: These generally come with low costs, so you aren’t seeing your investments as eroded by fees. Plus, you receive exposure to entire indexes at once, and you can even choose an all-market index that follows the performance of the entire market.
  • ETFsExchanged traded funds can make good choices as well. They are easy to buy and sell, and they also come with very low costs. You can invest in a variety of assets, keeping your portfolio properly balanced.
  • DRIPs: You can really give your investment portfolio a boost when you use dollar cost averaging to buy dividend stocks with automatic reinvestment plans. These DRIPs automatically use your dividends to purchase more shares, accelerating the rate at which you  build wealth. If you don’t want to invest in individual stocks, it’s possible to find dividend funds with automatic reinvestment.

Even though the above are very well suited for long term efforts at building wealth, you can invest in anything that you believe will provide you with the return you need. Look for good value in your investments, and then invest consistently over time. Dollar cost averaging will ensure that you continue to get the best bang for your buck over time.

Over time, how much you have put in will make a difference. And if you have invested consistently from a younger age, compound interest will have that much more time to work on your behalf. For the ordinary investor, consistency in dollar cost averaging can be one of the best options for building wealth over time.

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This post was written by...

– who has written 12 posts on Excess Return.

Miranda is a freelance contributor to several investing and personal finance web sites. She also writes for her own blog, Planting Money Seeds.

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