Investing can be challenging, and many decisions need to be made correctly for an investor to receive acceptable returns. One of the most important aspects of successful investing is choosing the appropriate time to deploy capital and obtaining chosen assets at a reasonable cost basis. A strategy that proves to be consistently affective in doing this is Dollar Cost Averaging.
Let’s assume an investor has $12,000 to invest in an individual stock or equity index. Rather than attempting to time the market bottom and make a lump sum investment, this investor would be well served to employ a DCA strategy, whereby, they purchase $1000 worth of the security at routine monthly intervals over the course of a year.
Doing so will provide the following advantages. In a volatile market, the investor will purchase more shares at lower prices and fewer shares at higher prices. This will reduce the average cost basis per share paid by the investor. Additionally, dollar cost averaging removes some of the risk associated with timing markets and ensures that the investor can participate in the gains of a rising market. Finally, DCA strategies encourage investors to invest regularly and build their wealth overtime, rather than trying to hit a proverbial home run by timing the market perfectly at its bottom.
DISCLOSURES
Regarding money market funds (Fund), you could lose money by investing in the Fund. Because the share price of the Fund will fluctuate, when you sell your shares, they may be worth more or less than what you originally paid for them. The fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.
Some of the potential risks associated with fixed income investments include call risk, reinvestment risk, interest rate risk, credit risk, default risk, liquidity risk and inflation risk. Additionally, it is important that an investor is familiar with the inverse relationship between a bond’s price and its yield. Bond prices will fall as interest rates rise and vice versa. Municipal securities investments are not appropriate for all investors, especially those taxed at lower rates.
This information is intended to serve as general information. The results are neither guarantees nor projections, and any interest rate assumptions, rates of return, inflation figures and other costs or figures are hypothetical and for illustrative purposes only. This analysis is hypothetical and no guarantees are made as to your ability to actually achieve these results. Market conditions, changes in tax laws or other unforeseen events could drastically alter the results. It is important to review your financial plan with your advisor on a regular basis. There is no solicitation and no recommendation for any action based upon its findings. The results of an analysis may differ significantly depending upon the facts assumed. Dividends are not guaranteed, and past performance is not indicative of future results and are not to be taken as guaranteed projections of actual returns from any recommended investment opportunity. All investments carry some level of risk, including loss of principal and diversification does not ensure a profit or protect against loss. An investment cannot be made directly in an index.
Robert W. Baird & Co. Incorporated does not offer tax or legal advice.