Investing isn’t always straightforward – in fact it can sometimes feel counterintuitive. Sometimes we find ourselves in the position of putting money into investment accounts only to see the totals continuing to go down instead of up – but that’s where it’s important to understand investing concepts such as dollar cost averaging. It’s especially important, the closer you get to retirement, to understand how investing can be counterintuitive, so you don’t make any rash decisions.
Dollar Cost Averaging
Often, people wonder why they should keep buying into the stock market when every day it is less and less. You may find yourself putting money into a 401(k) and finding that the next day, it’s worth less than the day before when you put it in. While this feels like an exercise in insanity, investing is different.
When you’re investing, you’re not just putting your money in a bank, you’re investing in companies – and these companies are the largest in the world and the key to our economy. The ownership that you purchase in these companies means that the more stock you own, the more of the company you own. It’s important to note that when stock prices are down, the same dollar amount you invest nets you more stock – so for example if you invest $1,000 in a company and the share value is $1,000 today, then you own one share. Meanwhile, if tomorrow the shares are trading at $100 per share, and you bought $1,000 worth you’d own ten shares.
When it comes to buying stocks, you want to purchase that stock as low as possible and when you own it, you want it to be as high as possible. Ideally, you’d buy all of your stock at a discount and while owning it, it would be at the highest possible price. In reality, the market is constantly changing, so that the environment is sometimes better for purchasing and sometimes better for owning or selling.
With dollar cost averaging, you’re investing consistently in the market so that you’re less impacted by volatility and you end up buying more shares at a lower cost.
It’s Counterintuitive
The worse time to stop buying into the markets is the exact time when it feel futile – when you feel your money going down right after you put it in. It’s actually the best time to buy, because you’re buying at a discount, but you need the patience to wait it out. While this intuitively makes sense, it can emotionally be a demoralizing act to deal with.
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