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Ride the waves with dollar cost averaging

submitted by Michael Pultro, RFC, and Brian Pultro, Pultro Financial Management, www.pultrofinancialmanagement.com

When is the best time to buy? That is a question posed frequently to financial advisors and it remains impossible to answer.

Perhaps when I receive my Christmas bonus? Perhaps after my tax return comes in? These may be times when we have extra money with which to invest. However, instead of dumping into the market all at one time, consider dollar cost averaging.

The premise behind dollar cost averaging is simple. Invest a set amount of money on a regular and consistent schedule. Let’s say every year you receive a tax return of $5,500, which happens to be the maximum amount you can put into an IRA before age 50.

You then deposit that lump sum into your IRA every year on May 1st. What happens if the market is approaching its highs for the year every time you make that deposit? You are consistently purchasing less shares at a higher cost. This diminishes our ability to accumulate more shares.

However, if we utilize dollar cost averaging, we then turn that $5,500 lump sum deposit into twelve deposits of $458 on the first of every month. This consistent approach provides us the opportunity to take advantage of dips in the market and allows us to purchase more shares at a lower cost. We purchase shares continuously regardless of that security’s price fluctuations.

An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

No one can predict where the market will be when you decide to make that lump sum deposit. But, with dollar cost averaging you may take advantage of the ups and downs.

Opinions are for general information only and aren’t intended to provide specific advice or recommendations.