Dollarcost averaging can help smooth out market fluctuations from "summary" of All About Asset Allocation, Second Edition by Richard Ferri
Dollar-cost averaging involves investing a fixed amount of money at regular intervals, regardless of market conditions. By consistently investing a set amount, you end up buying more shares when prices are low and fewer shares when prices are high. This strategy can help smooth out market fluctuations because it reduces the impact of short-term price volatility on your overall investment. When you invest a fixed amount regularly, you buy more shares when prices are low and fewer shares when prices are high. This results in an average cost per share that is typically lower than the average price per share over the same period. Dollar-cost averaging can help reduce the impact of market fluctuations on your investment returns, as you are less exposed to the risk of making a large investment at a market peak. By investing a fixed amount at regular intervals, you remove the need to time the market and make emotional investment decisions based on short-term price movements. Dollar-cost averaging encourages discipline and consistency in your investment approach, which can lead to better long-term results. This strategy allows you to take advantage of market downturns by buying more shares at lower prices, ultimately increasing your potential returns over time. While dollar-cost averaging may not guarantee a profit or protect against losses in a declining market, it can help mitigate the impact of market volatility on your investment portfolio. By spreading out your investment over time, you reduce the risk of investing a large sum at the wrong time. This disciplined approach to investing can help you stay focused on your long-term financial goals and avoid reacting impulsively to short-term market fluctuations.
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