What is dollar-cost averaging and how can it save you from market anxiety?

Click to read the full story at CNBC’s Grow site.

You know you should invest for the future, but you are afraid of today’s market.  Bad news seems to be lurking behind every corner, and uncertainty is …. the only thing that seems guaranteed. Should you buy now, or buy later?

One good solution: Do both.

CNBC and Grow recently asked me to explain the investment world’s solution to this age-old now-or-later dilemma: dollar-cost averaging. Your worst nightmare as an investor is to put all your money into the market right before a huge crash.  Yes, that does happen.  If you came into some cash in 2007 and bought a bunch of stocks or funds then, you probably lost about half your money within a year.  Ouch!  Such events are rare, but they do happen. And if the mere thought of that scenario paralyzes you, the answer is to dollar-cost average your investments.

What’s that? I explain in more detail, and back it up with some math, at CNBC’s Grow site, but it’s basically this: Don’t buy all at once. Instead, split the cash you have to invest into equal portions, and buy over time. That way, if the price of your investment drops, you’ll buy more at the lower price.  Your cost will be averaged over time. It’s a really good way to maximize your investment dollars while minimizing your fear.

The story has a surprise ending, however. While dollar-cost averaging is a really good idea, it’s not the best idea.  Over time, in a majority of cases, lump sum investing beats dollar cost averaging.  The returns are higher.

I sort all this out over at Grow, so I hope you’ll take a look.

 

 

 

 

 

 

 

 

About Bob Sullivan 1342 Articles
BOB SULLIVAN is a veteran journalist and the author of four books, including the 2008 New York Times Best-Seller, Gotcha Capitalism, and the 2010 New York Times Best Seller, Stop Getting Ripped Off! His latest, The Plateau Effect, was published in 2013, and as a paperback, called Getting Unstuck in 2014. He has won the Society of Professional Journalists prestigious Public Service award, a Peabody award, and The Consumer Federation of America Betty Furness award, and been given Consumer Action’s Consumer Excellence Award.

1 Comment

  1. This is very good to know. I have two notes.

    Conversely, when you *withdraw* a certain amount of money periodically, you’re doing the reverse of dollar cost averaging: you’re selling more shares when the market is low than when the market is high. So that works against you.

    My non-financial somewhat-off-the-topic observation is that Major League Baseball managers constantly make the mistake of this “reverse” dollar cost averaging. In later innings, pitchers who are doing well and get “3 up, 3 down” are typically removed after facing 3 batters. Pitchers who are doing poorly will see many more batters in an inning. At the very least, pitchers who do very well in the 8th inning should be left in for the 9th inning.

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