No one person can predict a stock’s future performance with 100% accuracy. If someone could, then they’re either a wizard from the future or an insider trader. For everyone else, investing is part skill, part chance, and a heck of a lot of research.
Even when you have all the knowledge, skill, and data in the world, you can still make crappy investments. Every investor has that one time or another when they buy a stock too high before it drops. There’s also the times when investors miss buying a stock at rock-bottom prices before it goes up in value.
Unfortunately, there’s no exact method of deducing future stock prices. There’s also no way to know when you’re making the absolute best investment until after you make it.
That’s where dollar cost averaging comes in.
If you’re thinking about buying a stock but don’t know when to buy it, you can buy it using dollar cost averaging. This method allows you to make several purchases of the same stock over time instead of making one single purchase. This way, your returns are based on the stock’s average value over time instead of the one time you bought it.
There’s a bit more to dollar cost averaging than buying it over time. To understand how this method works, investment expert Paddy Hirsch made this easy-to-follow video on the basics of dollar cost averaging. By following this technique, you could save yourself from the usual stock market stressors…and make a nice chunk of change, too!
How would you apply this to your own investments?
Let’s say you have $12,000 and want to invest in the $SPY index fund. Instead of spending $12,000 now on $SPY, you only invest $1,000. A month from now, you invest another $1,000. This continues on for the next year, or until you feel comfortable enough to stop. $SPY will go up and down during the year, and the gains (or losses) from your investments from each month will average together.
By spreading your money out over time with dollar cost averaging, you gain the ability to capitalize on a stock’s average performance. Instead of buying a stock and questioning its current performance, you’ll buy stock at highs, lows, and everything in between. Though this method doesn’t guarantee gains (or losses), it’s a simple way to put your mind at ease and avoid the fear of missing out on a purchase opportunity.