Dollar cost averaging may not be the most efficient, but its the best way to buy stocks
Small-business owners who don’t have all of their wealth tied up in their businesses usually prefer to take an active role managing their own investments. Over the long-term, prudent equity (stock) investments provide solid returns that beat inflation and other investment alternatives. When it comes to actually buying the shares, significant research has shown that the most efficient way is to buy them in large blocks. This minimizes transaction costs and more importantly places your investment sooner rather than later. Since markets tend to go up over time, the sooner you invest, the more of that increase in value will be present in your portfolio.
This flies in the face of what many individual investors believe is the best way to invest: dollar cost averaging (DCA). With DCA, you purchase a fixed dollar amount of a stock you want to buy at regular intervals over time regardless of fluctuations in the price. Sometimes you’ll pay a higher price, sometimes a lower price, but on average you’ll pay a good price for the security you want to buy. It also eliminates the risk of trying to time the market to maximize your return, something that is virtually impossible for the average investor to pull off successfully.
Although DCA may not be the optimal way to purchase stocks, it’s probably the best way for you to purchase because:
1. Most people don’t have a large sum of cash lying around waiting to be invested; instead money comes in over time so it should be invested over time.
2. Most people are terrible at timing the market and doing so will lead to stress and financial losses.
3. Most people need the consistency and discipline of investing fixed amounts at regular intervals to ensure that they follow through with their investments, instead of letting time pass waiting for the perfect opportunity.
