Stock market drops like the one we saw this week are natural, and most of us know you shouldn’t panic and sell. Still, it can be scary to buy $3000 worth of a fund only to see it completely tank the next week. The market always steadily returns, but if you’re really worried about these fluctuations, you might try dollar cost averaging.
In basic terms, dollar cost averaging is buying into the stock market steadily over time rather than all at once with one lump sum payment. The idea is you buy more shares when they’re cheap. Investopedia defines it as follows:
The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.
Sure, you can do this yourself by paying attention to market dips and then logging into your investment account to buy the funds yourself when prices are low. But many firms will take care of it for you automatically; you just have to sign up for the feature.
It’s worth pointing out here that a lot of studies show dollar cost averaging actually doesn’t make that much difference over time; you’ll probably do just as well investing all at once, because the market steadily returns. But if you can’t get over the dips, dollar cost averaging may help ease your fears about the market’s crazy fluctuations.
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