Seeking a strategy for investing during a down market? A plan of systematic, or regular, investing, known as dollar cost averaging, can help you take advantage of changing market conditions and avoid the futile approach of trying to time the market.
Dollar cost averaging basics
Regular investing can help you cope with the human tendency of hesitating to invest in a declining market, when stock prices may actually be more reasonable.
With dollar cost averaging, an investor invests the same amount at regular intervals — for example, $500 each month — regardless of whether stock prices rise or fall. Using this strategy, investors can buy more shares at lower prices and fewer shares at higher prices.
A program of regular investing can help take the emotion out of investing when markets turn particularly volatile, because your long-term strategy doesn’t change. There is no need to make a drastic adjustment. In fact, taking money out of the market or ceasing to invest during declines might result in selling low or missing the chance to add to a portfolio when prices are down.
The benefits of dollar cost averaging
To illustrate the potential benefits of dollar cost averaging, take a look at the table below. In this hypothetical example, an investor bought shares of a mutual fund at three regular intervals, paying $15, $10 and $20 per share. When the price fell to $10 per share, the investor bought more shares. When it rose to $20 per share, the investor bought fewer shares.