Why Dollar-Cost Averaging is Key During Uncertain Times
Since the creation of the stock market, one question has plagued investors. How do I ensure I’m not buying into the market at the wrong time? While many claim to have a crystal ball and know exactly what is around the corner. The team at UNest believes in using a more proven approach, Dollar-Cost Averaging. When dollar cost averaging investors pick a set amount of money to invest on the same day every month and then sit back and watch their portfolios improve. Or in the case of our clients, their children’s future improve. In this article, we will explore the economic and psychological benefits of dollar-cost-averaging.
The practice of dollar-cost averaging is investing a fixed amount across your UNest portfolio — regularly, no matter the market conditions are. If share prices are higher you will purchase fewer shares that month. If they are lower you will be getting a discount and buying more. It’s an easy way to be sure you’re not buying everything at the highest possible price, and people often use it because they believe it’s the best way to reduce volatility in the long run.
At UNest, we enable dollar-cost averaging through our recurring contribution option within your UNest account. With this feature, you may take a portion of your income and invest it into your child’s future regularly. Investments are made on a bi-weekly or monthly basis. As noted earlier, our goal is to help clients manage risk and maintain consistent investments.
Here’s an example of how this approach can decrease volatility:
Let’s say you’re going to invest $100 a month for seven months. Below is a case of monthly contributions and their returns.
The most beneficial part of dollar-cost averaging is psychological, not financial. For those who are risk-averse or new to investing, this is an excellent opportunity to ease into the market. Investing small amounts regularly vs. a large lump sum allows the investor to get comfortable with normal market fluctuations.
To summarize, the key advantages of dollar-cost-averaging are listed below:
- Investors reduce the short-term risks associated with a market crash, especially relevant in turbulent times like those we find ourselves in today.
- By investing the same amount every month, investors automatically buy more shares when the market is down and fewer when the market is up.
- Peace of mind for the investor.
At UNest, we believe that the path to a debt-free future for our children is by actively managing our client’s 529 accounts and encouraging them to contribute the same amount regularly. While dollar-cost-averaging is not for everyone, we believe it will offer a stable path to success for your family.
Blogs and articles contain the current, good faith opinions of the authors but not necessarily those of UNest. The documents are meant for educational purposes only and should not be considered as investment advice or a recommendation of any type. The documents may contain forward-looking statements.