With the advent of the Internet, stock investing was suddenly democratized. In a very few short years, it became possible for “regular folk” to invest directly in the stock market. Individual investors were no longer obliged to trade through a stock broker. Mutual funds didn’t need to be bought through a bank. Fees and returns could be compared easily. Information about companies financial situations was available for anyone who took the time to visit a company’s website and spend the time reading the vast quantities of information posted there. All of this is great; more information is always better, right?
Well, no. Especially when you’re getting started. Too much information quickly becomes confusing, and very shortly thereafter, overwhelming.
Like anything else, too much information is a bad thing. (Caveat: This is true unless you’re a professional investor, or investing is your chosen hobby.)
Dollar cost averaging is one of the most powerful concepts that affects you as a retail investor. It is also one of the simplest, most effective, and virtually idiot-proof ways to get both time and math working for you.
You get time working for you, because regardless of how much money your have to invest, you can get started right now. Because you choose the amount you are able to invest, dollar cost averaging also allows you to make regular investments at a level that you can afford throughout the year. Once making these investments becomes one of your monthly money habits, you won’t even notice the “missing” money. Consider it a monthly bill; one that must be paid not to a bank or utility, but to your future self.
Dollar cost averaging gets math working for you because you automatically buy more shares when stock prices are lower, and buy fewer shares when stock prices are higher.