Are we in a full-scale stock market correction? Is it a practical time to invest? Should you just stay on the sidelines? Despite plenty of forecasting, no one really knows where the market is headed. But many experts agree that average investors with a long-term mindset should consider dollar-cost averaging--investing a set amount of money on a regular basis over an extended period of time--instead of trying to time the market and investing a lump sum.
One of the most common mistakes investors make is letting their emotions take charge in times of market turbulence. It can be difficult to sit still when stocks are in freefall, and it's tempting to buy when stocks are on a tear. With dollar-cost averaging, investors can make a plan to invest on a consistent basis, which can keep them from making decisions based on the latest twists and turns of the market.
"There's an inclination when markets are down for people to stop [using dollar-cost averaging], but that's really the best time," says
The market meltdown in 2008 scared many investors away from stocks and they poured into safer investments like bonds. Subsequently, many of those investors missed the incredible rally in 2009. Investors who were dollar-cost averaging were able to buy some securities at rock-bottom prices. Says Bold: "Even if you go back to the last really terrible market between the fourth quarter of '08 and the first quarter of '09--people who were dollar-cost averaging--how lucky were they to have been able to buy shares during that time?"
Critics of dollar-cost averaging say that by only investing small amounts over time, you could miss out on great opportunities, such as strong market pullbacks, to invest a lump sum of money. "Let's say we expect an upward-trending market," says
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Bold says now is as good a time as any to start investing. He suggests investing half of your money to start, then investing 20 percent of your remaining funds on the same day of each month over the next five months. After implementing this strategy, Bold says the only thing you need to do is occasionally check up on your investments.
If you're going to invest a set amount on a regular basis, it's important to know how much you're paying in transaction costs. If you're purchasing individual stocks, mutual funds, or exchange-traded funds, fees associated with buying or selling can eat into your initial investment. Brokerages charge investors for buying individual stocks and shares of ETFs.
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Investing - How to Keep Your Cool in a Turbulent Market | Successful Investing
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