Timing the stock market is a very inexact science. For as many people that claim that they can do it well, there are just as many who have failed at it. There is another method that can allow for the possibility of financial success.
This method is called Dollar Cost Averaging and involves investing a fixed amount of money in an asset on a consistent basis over time. The concern of investing in non-guaranteed investments comes from the possibility of market volatility. Dollar Cost Averaging allows you to use the volatility of the markets to your benefit.
Here is an example of how this works: an investor contributes $1,000/month to a mutual fund for five consecutive months. The purchase prices for the five months are $20/unit, $18/unit, $17/unit, $20/unit, and $22/unit. Over these months, a total of 264.25 units would have been purchased with the $5,000 total contribution. The value of this $5,000 ($1,000 x5) investment after five months would be $5,813.50 (264.25 units x $22/unit). If the full $5,000 was contributed at the beginning of the period at $20/unit, the value would be $5,500. Spreading the investment over five months enhanced the value by $313.50.
In the example above, the investment decreased in value shortly after the first contribution was made, which allowed for more units to be purchased and a larger market value once the investment increased in value.
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The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal advice. Please speak to your personal financial representative before making any financial decision or implementing any strategy. Mutual funds are offered through Credential Asset Management Inc.