This is the third installment in an eight-part series: Navigating Market Volatility. In simple terms, market volatility is the relative rate at which the market goes up and down. Dramatic shifts can be scary, even for the most experienced investors. To keep market swings from making you anxious, take steps to help you respond to volatility in a deliberate way.
To read the previous post in this series click here
Navigating Market Volatility: Invest at Regular Intervals
In a perfect world, we would always know the right time to buy (low) and sell (high). But in the real world, market behavior is difficult, if not impossible, to predict. An investment strategy known as dollar-cost averaging can help take the guess work out of when and how much to invest. Dollar-cost averaging is an investment technique of purchasing a fixed dollar amount at regular intervals over a period of time. This long-term strategy can help reduce your exposure to the possible risks associated with making a single large purchase at the “wrong” time.
With dollar-cost averaging, the dollar amount of each investment remains constant, but the number of shares you buy varies based on the share price at the time of a purchase. When the markets are up, you buy fewer shares; when the markets are down, you buy more shares. Dollar-cost averaging can relieve you of the stress of constantly monitoring market movements in an attempt to “time” your investments.
The charts below demonstrate how dollar-cost averaging works.
Scenario 1: Purchase a Fixed Dollar Amount Monthly
|Monthly Investment Amount||Price per Share||Number of Shares Purchased|
Scenario 2: Purchase a Fixed Number of Shares Monthly
|Number of Shares Purchased||Price per Share||Monthly Investment Amount|
Dollar-cost averaging can smooth out some of the short-term “bumpiness” of the financial markets. By investing regularly over a number of years (or decades), short-term downturns will have little effect on the long-term performance of your portfolio.
All investments are subject to risk, including the possible loss of the money you invest. Past performance does not guarantee future results. There is no guarantee that any particular asset allocation, or mix of funds, or any particular mutual fund, will meet your investment objectives or provide you with a given level of income.