Dollar Cost Averaging: A painless way to start investing

Particularly when you are young, learning how to get started investing can seen impossible. Chances are good that you don't have money socked away to drop into the stock market, but you've probably heard about the incredible potential of growing your money through the market.

Dollar cost averaging is a popular investment strategy that can be used by almost anyone. It allows for investments using small amounts of money over long periods of time. Dollar cost averaging reduces risk, makes investing more manageable and grows your investments over the long term.

How does Dollar Cost Averaging work?

Dollar cost averaging is simply the strategy of investing a predetermined amount of money into a specific investment or investments over a specific period of time. For a beginning investor this may look like investing $50 every paycheck into an index fund or Exchange Traded Fund (ETF).

That $50 would be automatically invested into that fund every other week, buying however many shares that can be bought for that price. As the share price fluctuates the number of shares purchased will also fluctuate. For example, if one week the price is $10 this investor would have purchased five shares. If the next investment date the share price was $5 ten shares will have been purchased.

Reducing Risk

Dollar cost averaging reduces risk for an investor by spreading their investment out over a long period of time. The full investment amount is not used to purchase the shares at one time, risking potentially volatile price changes.

Using this system there is no worry that the money was used to purchase shares at a point when the price was particularly high. Since the price at which the shares are purchased keeps changing the focus in on share accumulation.

Making Investing Easy

Dollar cost averaging makes investing easy for anyone. Once the automatic investments are established there is no worry about making sure the shares are purchased at the correct times and since the investments are going into the same securities there is no worrying about picking the right investment.

Better yet, the stress of watching your portfolio go up and down is reduced as when prices are down the investor can rest assured that they are going to get a good deal on picking up a few more shares.

Then it is just a matter of time until the share price grows and the added number of shares will multiply the earnings.

Grow Your Investment!

As the price of the security goes up and down, the one constant is that the number of shares in the portfolio will continue to increase. This is an excellent way to grow an investment, as the number of shares, if not the share value, goes up and up.

Investing into an index fund or ETF helps to make sure you are well diversified and reduces the risk of major loss. Dollar cost averaging allows the investor the peace of mind of knowing that value is being built as the number of shares increases.

Dollar cost averaging provides many great benefits to investors of all levels of experience. It grants peace of mind, spreads out risk, and promotes portfolio growth. It is an effective strategy that can work for anyone, and that can work in your investment portfolio!