Dollar cost averaging is a dead-simple investment technique that may help young investors achieve long-term gains with less risk. Within an hour you can have this stock market investment strategy set up and working for you.
Long-term gains using a dollar cost averaging plan.
Dollar cost averaging allows young investors to purchase stock investments consistently over a longer period of time. This stock market strategy works especially well with broad-based market index investments like the mutual funds and ETF’s that mirror the return of the S&P 500. This powerful and simple investment plan will help lower risk and you have the potential for higher returns.
For young investors looking for consistent gains over time, establishing a dollar cost averaging plan could be a perfect solution. Young investors are able to purchase more shares when the stock market experiences short-term corrections. That way when the index turns around and starts heading up in value young investors are able to profit more because they own more shares.
When the market is rising young investors are able to capitalize on the market trend because they are following a consistent investment plan. As they purchase more and more shares in a bull market that money is going to work for them right away.
Dollar cost averaging spreads the prices that you purchase stock market investments (cost basis) over a longer period. Investors are protected from stock market corrections and benefit from long-term gains in the market.
Steps to creating an effective dollar cost averaging plan.
For young investors creating a successful dollar cost averaging plan is simple. There are two basic steps that will get your money working for you:
1. Decide on the exact amount of money you will invest each and every month. The key to a successful dollar cost averaging plan is consistency. You can increase your investment over time but avoid investing different amounts each month.
2. Set up the exact times you invest. If you decide to invest once per month do so on the same day. For instance, the fifth of every month invest $150. It gets even easier when you put your dollar cost averaging plan on auto pilot. Set this up one time and your investments are made automatically for you each and every month. All you have to do is check your statements to see how your investments are doing.
Improve your dollar cost averaging plan through diversification.
Diversification is a simple spreading out the risk of owning a stock investment by owning many different stocks in a variety of sectors. Instead of owning one individual stock, which is very risky for the inexperienced, you may choose to own a group of stocks. This will reduce the risk of owning any single investment. The investment of choice for many young and beginning investors is broad based indexes.
An example of a broad based market index is the S&P 500. By investing in the S&P 500 index you own a piece of every stock that makes up the S&P 500. Stocks like American Express, Google, Ford, Nordstrom, Home Depot, Staples and Yahoo are a few of the stocks that make up that index. That way you’re protected in case one of the stocks in the S&P 500 drops 70% of its value, you’re only invested 1/500th, and you won’t experience too much loss from that. In comparison, if you just owned that stock by itself you would have lost 70% immediately.
For young investors, keeping your investments diversified and using a dollar cost averaging investing technique – you have effectively reduced risk and are in an excellent position to achieve long-term profits.