With all of the stock market charts and financial analysis tools, it is nearly impossible for any investor to consistently and accurately determine the “ideal” price point of a stock.  Investors seeking the tops or bottom of a stock’s price are typically off the mark.

With dollar cost averaging, the risk of purchasing a stock at the “wrong” price is mitigated.  Dollar cost averaging is a type of investment strategy that is used to reduce the amount of market risk an investor faces.  The amount of risk is reduced by making systematic purchases of an investment, typically mutual funds or shares in a specific company over an extended period of time.  This not only eliminates the irrational emotions involved with investing, but provides you with a steady, stable long-term strategy. 

The built in advantage to dollar cost averaging is that you naturally purchase more shares when the price is low, but less when the price is high.  Therefore, you systematically obtain an average price that is better than attempting to purchase based upon market timing strategies.  

If you are not currently practicing dollar cost averaging, then there are three steps that will help you to begin a strategy plan. Start reducing your amount of risk today by implementing a dollar cost averaging plan that works.

How to set up a dollar cost averaging strategy

• First, you must determine the amount of money you can afford to invest each month or quarter.  It is very important that you commit to invest a consistent amount of money on a regular basis, or else the benefits of dollar cost averaging strategy are rendered less effective. 

• The next step is to choose an investment appropriate for achieving your financial goals. Evaluate the potential growth of the investment and set minimum earning goals that you can evaluate yearly.  The length of holding time for investing with a dollar cost averaging strategy is often three to ten years.  

• Lastly, determine how often you will make purchases.  Whether weekly, monthly, or quarterly, you will consistently invest in the securities you have previously selected. You can have your financial broker set up a plan that will automatically withdraw the money from your account and invest it into the desired securities.

Dollar cost averaging allows you to invest your money over the course of several years, thus reducing your market risk.  You essentially are provided with a cushion from major fluctuations in the stock price.  If your investment funds are limited, this is a great way for you to begin building your portfolio.  However, even the largest stock market investors practice the dollar averaging strategy for long-term investments.  Dollar cost averaging is a successful strategy that will allow you to build an investment in a systematic and emotion free way.