Erickson Financial Solutions Blog
1-minute video: How Dollar Cost Averaging Can Help You Make Smart Investments?
Simple Method to Better Investment Results
When investing in mutual funds or stocks, there are many issues to consider. Here we describe a simple method to boost long-term investment results with mutual funds that a novice or an expert investor in Columbia or Jefferson City, Missouri can use.
The fancy name for the method is Dollar-cost averaging and here is how it works. The investor contributes the same amount to their investment portfolio at regular intervals: weekly, monthly, quarterly, etc. This is a very common practice with a retirement account such as a 401(k), but can be done manually with an account not part of a 401(k). When the contributions are made, purchases of funds are made regardless of the price. As you might expect, as the price of the fund drops, it actually buys more share of the fund. As the price goes higher, the constant dollar contribution buys fewer shares. In this way, the simple process is following the old adage, “buy low, sell high” in that you are buying the most number of shares with your contribution at lower prices and fewer shares when the price is high. The investor is not actually selling shares in this method, but is not buying as many shares at high prices. As the market bounces up and down, the investor will accumulate more shares at cheaper prices to later be sold in retirement. When retirement arrives you will have a larger number of shares which translates into more wealth depending upon the price at retirement. It is a simple, automatic process for increasing the chance of buy when prices are low and fewer shares when prices are high.