INVESTORS WHO WANT MORE discipline in reaching their savings goals can benefit from dollar-cost averaging.
Dollar-cost averaging can lead to more consistent savings over time as money earmarked for savings is taken out before it’s spent on other items.
There are numerous benefits to this investment strategy versus lump-sum saving – as sometimes people who try to invest using a lump-sum approach have a harder time reaching their savings goals because they focus on saving last, not first.
What Is Dollar-Cost Averaging?
Investors who use dollar-cost averaging to save create consistent intervals to fund their financial accounts. This strategy can be biweekly, monthly, quarterly or on any other time frame suitable for the investor, says Robert Wyrick, chief investment officer at Post Oak Private Wealth Advisors.
It’s important to not confuse dollar-cost averaging with market timing, and it’s also important to leave the investing on autopilot, Wyrick says. He explains that sometimes he’ll hear people say they want to dollar-cost average, but then they override their predetermined investing dates based on what the market is doing.
“That becomes an exercise in timing, which is difficult to do successfully,” he says, which is why it’s important to stick to set days to invest – such as the 15th and 30th of the month.