dollar cost averaging

Dollar cost averaging is absolutely the right approach for long term investors. It refers to investing a set amount of money at regular intervals, regardless of whether the market is going up or down. It's a great way to invest "unemotionally" and is generally what happens with 401k investing. The recent article How to beat the market without even trying makes the case very well for an automatic and regular approach to investing. As suggested, while dollar cost averaging may be boring, it delivers solid results, and that's what matters.


When investing, boring is good. So are solid results over time.


Another article which discusses successfully acquiring the funds necessary to meet our retirement needs is 3 Biggest Drivers of Retirement Savings Success. Aligned with the advice contained in the article cited hereinabove, a disciplined approach to savings and investing is recommended.


One perhaps somewhat surprising fact is that upon reaching retirement, those people most prepared financially and those least prepared financially to meet their retirement needs earned approximately the same income. Thus, the broader point is simply that it isn't how much money we earn, but what we do with those earnings with respect to savings. What matters most is developing the habit of saving enough money routinely and then investing those savings through a dollar cost averaging or similar technique.


In sum, the market's historical tendency is to appreciate at rates of return well above the rate of inflation. However, the short term market is dominated by traders and not investors. Hence, on a daily basis stocks frequently move up and down in a volatile manner. An emotional roller coaster ride, if you're a trader. That's because the market is as likely to go down as up on any day, week or month, or even any given hour of any given day. News headlines or events du jour are usually the daily drivers.


So what's a long term investor, as opposed to a short term trader, supposed to do? Relax and employ the automatic and unemotional dollar cost averaging approach to long term successful investing.


Here's the heart of the matter. The only two points in time the price of the stock is critical are when it's bought and later when it's sold. That spread between the buy and the sell price, and that spread alone, will determine the realized profitability of the investment.


Psychologically, people experience more pain due to loss than than they experience joy with gain. This is especially true with "unrealized losses" when the market declines. Thus, emotions often have an undue influence over what individuals choose to do or not to do, as the case may be. Buffett says that while in the short run the market is a voting machine, in the long run it's a weighing machine. Companies are worth what they are able to earn over time. Nothing complicated about that.


In a nutshell, dollar cost averaging makes sense. It takes the short term emotion out of the investing decision. We buy regularly no matter what direction the market is heading, what the news headlines may be or what the "experts" may be saying at that particular time.


For some inexplicable reason, stock purchases are often an exception to the common sense rule that people like to buy things on sale. I've never understood that. My guess is it's attributable to fear and anxiety, and that acquiring financial knowledge about how markets work would go a long way toward helping individuals sleep well and also achieve successful financial security over time. We simply haven't acquired the general knowledge necessary for what I'll call "comfortable investing". We don't need investing expertise as such. We just need to know generally how things work and why they work that way. As we come to know the basics, that knowledge will help us achieve our long term financial goals.


We Americans are very much in need of a demystification process when it comes to markets, capitalism, education, governments and freedom.


Thanks. Bob.