How to Invest in a Rising or Declining Market
If you haven’t started investing toward a long-term goal because you’re worried about recent new highs in the major stock indexes such as the Dow Industrial or the S&P 500, you are not alone. It’s true that what goes up must come down and there is sure to be short-term market volatility at some point this year. In your case, consider using a popular investment strategy called dollar cost averaging, which takes some of the guesswork out of investing in the stock market. Instead of waiting to invest a single lump sum until you feel prices are at their lowest point, you invest smaller amounts of money at regular intervals–the same amount each time–no matter how the market is performing. Your goal is to reduce the overall cost of investing by purchasing more shares when the price is low and fewer shares when the price is high. Although dollar cost averaging can’t guarantee a profit or protect against a loss in a declining market, over time your average cost per share is likely to be less than the average market share price.
How does dollar cost averaging work? To illustrate how dollar cost averaging works, let’s say that you want to save $3,000 each year. To reduce the risk of buying when the market is high, you decide to invest $250 in a mutual fund each month. This approach can help you take advantage of fluctuating markets because your $250 automatically buys fewer shares when prices are higher and more shares when prices are lower.
You may not realize it, but if you’re investing a regular amount in a 401(k) or another employer-sponsored retirement plan via payroll deduction, you’re already using dollar cost averaging. In fact, you can use dollar cost averaging to invest for any long-term goal. It’s easy to get started, too. Many mutual funds, 529 plans and other investment accounts allow you to begin investing with a minimal amount as long as you have future contributions deducted regularly from your paycheck or bank account and automatically invested.
3 tips to help you put this strategy to work for you:
- Get started as soon as possible. Once you’ve decided that dollar cost averaging is right for you, start investing right away. The longer you have to ride out the ups and downs of the market, the more opportunity you have to build a sizeable investment account over time.
- Stick with it. Dollar cost averaging is a long-term investment strategy. Make sure that you have the financial resources and the discipline to invest continuously through all types of markets, regardless of price fluctuations.
- Take advantage of automatic deductions. Having your investment contributions deducted and invested automatically makes the process easy and convenient.
–R. Heath Morris, CFP®
Vision Financial Group
4505 Pine Tree Circle, Birmingham, AL 35243
Prepared by Broadridge Communication Solutions, Inc. Investment Advisory services offered through Investment Advisors, a division of ProEquities, Inc., a Registered Investment Advisor. Securities offered through ProEquities, Inc., a registered broker-dealer and member of FINRA & SIPC. Vision Financial Group, Inc. and West Alabama Bank are independent of ProEquities, Inc. Securities and insurance products offered are not bank deposits, have no bank guarantee, are not FDIC insured, and may lose value.