You must consider your ability to continue investing through periods of high and low price levels.
Stock market fluctuations are a normal part of investing.
But if market volatility causes you anxiety that interferes with your ability to make sound investment decisions, consider a strategy to mitigate your downtime.
Dollar cost averaging is an investment technique that may help you sidestep those emotions and put you on a steadier track toward your investment goals.
Dollar cost averaging is a long-term technique in which you invest a fixed amount in the same investment, such as stocks or mutual funds, at regular intervals over time. It requires some discipline, because you continue investing according to plan regardless of price fluctuations.
Suppose you were to invest $100 a month for five months in the same hypothetical stock. Through dollar cost averaging (hypothetical purchases), you buy 10 shares at $10 per share the third month; 9.09 shares at $11 per share the fourth month; and 10.53 shares at $9.50 per share the fifth month. At the end of this period, you would have purchased 54.06 shares at an average share cost of $9.25. Had you invested the same $500 in a lump sum in the first month, you would only have bought 50 shares, and the average cost per share would have been $10.
Dollar cost averaging can be a very flexible strategy. You determine the investment amount and the frequency of your purchases, and you may adjust your strategy as your needs dictate. You must consider your ability to continue investing through periods of high and low price levels.
Do also note that this strategy does not guarantee a profit and does not protect against losses in declining markets.