Dollar cost averaging (DCA) is a simple and effective strategy for beginner investors to build wealth over the long run in the stock market. This article explains the Dollar Cost Averaging for Beginner Investors in detail and how beginners can utilize it to invest in stocks.
What is Dollar Cost Averaging for Beginner Investors?
Dollar cost averaging (DCA) means investing a fixed amount of money in stocks at regular intervals over a long period of time. By sticking to a DCA plan, you buy more shares when prices are low and fewer when prices are high. Over time, this results in a lower average cost per share versus investing the same amount of money all at once.
How Dollar Cost Averaging Works
As a beginner investor, you may be hesitant to invest directly in the stock market as it can be volatile and risky. However, with a DCA strategy, you don’t need to time the market or predict when stocks will go up or down. You simply invest a fixed amount on a regular schedule, regardless of market conditions.
For example, say you want to invest $300 per month in an S&P 500 index fund for retirement. Over the next 6 months here’s what could happen:
|Month||Share Price||Shares Purchased||Amount Invested|
Total invested = $300 x 6 = $1,800 But because you bought more shares at lower prices, your average cost per share is $28. Although share prices varied, by sticking to a fixed DCA plan you were able to buy the most shares when they were on sale. Dollar cost averaging takes the emotion out of investing in volatile markets.
Over longer time periods, share prices historically trend upward. So, by systematically investing over many months and years using DCA, you can achieve solid returns in the stock market. While past performance is no guarantee of future results, DCA investing is a proven strategy for accumulating wealth in stocks over the long run.
The Benefits of Dollar Cost Averaging for Beginner Investors
Here are the main benefits of using a DCA strategy:
•Takes advantage of stock market volatility – Buys more shares when prices drop, which means a lower average cost per share over time.
•Easy to implement – Requires systematically investing a fixed amount of money on a regular schedule. No complex strategies or market timing needed.
•Reduces risk – By not investing large amounts at any one time, you avoid the risk of buying at the top of the market. Your money has time to remain invested for the long run.
•Instills discipline – Makes investing second nature through an automated plan. This discipline serves you well as you progress in your investment journey.
•Achieves solid long-term returns – Although past performance is no guarantee of future results, historically the stock market has always recovered losses and gone on to new highs. By staying invested for the long run, you can achieve attractive returns.
How to Get Started with Dollar Cost Averaging
Follow these steps to utilize a DCA strategy for your stock investments:
- Determine a regular investment interval – The most common intervals are monthly or quarterly, but you can choose any interval that works for your budget. The more frequent the intervals, the more you can take advantage of volatility.
- Decide on an amount to invest – A good start is $500-$1000 to begin with and increase the amount over time as your income grows. The key is to choose an amount you can regularly invest over the long run.
- Open a brokerage account – You need a place to buy stocks and funds for your DCA plan. An online broker that offers no or low commissions is good for small periodic investments.
- Select investments – Choose stocks, index funds or ETFs to invest in based on your financial goals and risk tolerance. It’s best to start simple with a few broad market funds.
- Setup automatic investments – The key to DCA’s success is making investments automatic. Most brokers allow you to set up automatic transfers from your bank account to fund your DCA