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You Can Dollar Cost Average Your Way to a Million Dollars
Personal Finance

You Can Dollar Cost Average Your Way to a Million Dollars 

 

dollar cost average

The world of investing can be incredibly complex. Plus, advice about how to create a winning investment strategy abounds, making it hard to pick an approach that will help you achieve your financial goals. If you’re overwhelmed by investing but want to find a path that allows you to create a million-dollar portfolio, dollar-cost averaging could be your answer. It’s straightforward, effective over the long term, and accessible to most investors. If you want to learn how you can dollar cost average to a million dollars, here’s what you need to know.

What Is Dollar-Cost Averaging?

Dollar-cost averaging is an investment strategy that focuses on consistency. You invest a set amount of money on a regular schedule no matter what is happening in the market. Timing your investments isn’t part of the process. Instead, you purchase assets at the designated time regardless of the price.

For example, let’s say you have $5,000 a year to invest. Instead of purchasing $5,000 worth of stock all at once, you break that amount down into smaller pieces. You could invest $100 a week for 50 weeks or $500 a month for 10 months.

Then, you set up the investment to occur automatically based on the interval you choose. Essentially, it’s a set-it-and-forget-it strategy, as you don’t factor in the current price of the stock at the times of purchase.

Now, you don’t have to limit yourself to a single stock. Instead, you can put a portion of each installment to different securities. The trick is to remain with the same ones over the course of the entire timeline.

The Benefits of Dollar-Cost Averaging

Dollar-cost averaging comes with a few different benefits. One of the biggest ones is that it makes investing simpler. You don’t have to worry about stock prices and movements or remembering when to invest. You are investing the same amount of money at each interval regardless of the price of the security.

While dollar-cost averaging doesn’t allow you to capitalize on quick price changes, it eliminates the need to time the market, as well as the stress that comes with it. Plus, you do get to seize some of those opportunities.

You’re buying the stock regularly. In some cases, that means getting to take advantage of low prices. As a result, that reduces the impact of the times when you bought high, often allowing you to come out ahead overall.

In many ways, dollar cost averaging helps you navigate the volatility of the stock market passively. Yes, you’ll end up spending more on a single share sometimes, but you’ll also get the benefit of low prices when they occur. That’s the power of dollar-cost averaging.

How to Dollar-Cost Average to a Million Dollars

If you want to use dollar-cost averaging to reach a million dollars in your portfolio, you need to think long-term. The dollar cost average approach needs time if it’s going to help you come out ahead, so this isn’t ideal if you plan on selling quickly or want to shift your investments around often.

Consistency really is the key. That way, you’re offsetting the highs with the lows, something you may not be able to do if you invest a lump sum all at once.

Additionally, you’ll want to keep investing over time. Unless you’re dealing with a substantial lump sum, you can’t always expect it to reach a million-dollar value without putting more money into the market.

It’s also important to note that the earlier you start, the easier it is to reach millionaire status. Smaller investments when you’re younger get the benefit of longer-term growth and compounding returns, something that can be crucial if you want a sizeable portfolio for retirement.

When you look at the big picture, the market rises over time. That’s why viewing these investments as long-term is crucial.

However, that doesn’t mean you can’t reevaluate where you’re putting your money as the years pass. New investment options emerge, and risk tolerances change. It’s okay to look at your portfolio to make sure it’s both balanced. You just don’t want to make changes too often if you’re trying to take advantage of dollar-cost averaging.

Further, maintaining a diverse portfolio is still important. If you combine dollar-cost averaging with diversification, you’re protecting yourself from volatility in the market even more. When you’re saving for a major goal – like having a comfortable retirement – that’s an important part of the equation.

Is Dollar-Cost Averaging Right for You?

Ultimately, how you invest is a personal choice. However, if you want to automate your investing, reduce the impact of volatility, and plan on leaving the money in place for the long-term, dollar-cost averaging could be right for you.

If you’re new to investing, using a dollar-cost averaging strategy could also be a good choice, especially if you begin with ETFs or index funds that have a built-in level of diversification. It’ll help you get started in a straightforward way, making your first steps into the market less intimidating.

In either of those cases, the dollar cost averaging approach is worth considering. But if something else is a better fit, that’s fine, too. In the end, you have to make the right choice for you, ensuring you are comfortable with your strategy now and into the future.

Do you have any other tips that can help someone dollar-cost average their way to a million dollars? Share your thoughts in the comments below.

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Check out these helpful tools to help you save more. For investing advice, visit The Motley Fool.

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