Why Dollar-Cost Averaging Investment Strategy Matters
- Stock Investing
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If we look back just 10 years ago, a regular person had limited access to any sort of reliable investment instrument. Forex was flourishing due to its low commissions but the stock market was still far from being accessible to retail investors. Moving fast forward to today, Forex vanished as the stock market became much easier to invest in. Everyone can start an investment with nearly zero commissions on trades and using just their smartphone.
As everyone can now start investing, the important question is what type of investment makes the most sense. There are several types of investment strategies and none of them are wrong. Each type of investment strategy has its audience but the most important part is to pick a strategy and stick with it.
One emerging strategy that retail investors use is dollar-cost averaging. This investment strategy benefits retail investors as most people do not have large amounts of money to invest at a time and will decide to invest a bit every single month.
Dollar-cost averaging uses a simple premise and that is that the stock market will continue to appreciate. What investors do is to pick stocks that have a bright future, competitive advantage, and that they are certain will perform well for the next couple of years. As the company performs better, the stock will appreciate it. When dollar-cost averaging, investors continue to buy stock in their companies of choice every single month. If the stock continues to appreciate over time, they will make a profit on each purchased asset. If the stock experiences a temporary downturn and depreciates, it allows buying the stock at a discounted price. Since this investment strategy is focused on long term holdings, the stock will appreciate over time and it will overturn the eventual losses during the dip.
Certainly, there are other types of investment strategies. Dollar-cost averaging can be integrated into different types of investment mindsets. It can be used for dividend growth investing and it can also be used in a growth-focused portfolio.