It’s time for another round of investment advice from uncle Ramit at I Will Teach You To Be Rich
Well then, what is it? Here’s Ramit with an explanation:
Dollar-cost averaging is a fancy phrase that refers to investing regular amounts over time, rather than invest all your money into a fund at once. This is the essence of Automatic Investing, which lets you consistently invest in a fund so you don’t have to guess when a market is up or down.
Pretty simple, huh? Say you have $10,000 to invest. Instead of buying $10,000 of a fund all at once, you split it into $1,000 contributions each month for 10 months.
But why should you practice dollar-cost averaging? Why not stick all your money into a fund at once and be done with it? The short answer is to reduce risk by diversifying your money over time. But I’ll let Ramit explain:
Imagine if you invest $10,000 tomorrow and the stock drops 20 percent. At $8,000, it will need to increase 25 percent (not 20%) to get back to $10,000. By investing over time, you hedge against any drops in price—and if your fund does drop, you’ll pick up shares at a discount price. In other words, by investing over a regular period of time, you don’t try to time the market. Instead, you use time to your advantage.
I’m sure many of you with investment accounts already practice dollar-cost averaging. Go ahead, pat yourself on the back, because you’re a WINNER! Plus, now you have a great way to make yourself look smart at dinner parties. Just mention, with a slight yawn, how you were recently dollar-cost averaging your investments and are pleased with their performance.
So, if the principle is so simple, why does it have such a fancy name? The answer, it would seem, is so that self-aggrandizing, so-called financial experts can lend more of an aura of complexity and mystery to their craft. Make sure to mention your disdain for the “experts” at your dinner parties as well. And that’s my rant for the day.
Tags: dollar cost averaging, I Will Teach You To Be Rich, Ramit Sethi
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I'm Damien Olenslager. I recently graduated debt-free from college and now work in the tax industry.
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