May 23, 2014
When it comes to your personalized investment plan, having a sound investment strategy is key. There are many investment strategies to consider, all of which are dependent upon your unique financial situation, however, one common investment strategy that helps take the guesswork out of market timing is dollar cost averaging. This simple strategy is used by investing a fixed dollar amount at set intervals over time, such as, buying a $1000 worth of a particular stock every month, for 12 months. This means that you will be buying more shares of a stock when the price is low and fewer shares of a stock when the price is high. The ultimate goal is to buy more shares at a lower average cost per share over time. This can be an effective investment strategy if used properly, however it might not always produce the maximum returns over time.
Another strategy to consider is lump sum investing. This strategy can potentially result in higher overall returns, when compared to dollar cost averaging, because your whole investment has more time to grow; however, there is also the risk that you invest at a volatile time and experience greater loss. Lump sum investing is used when an investor wishing to invest in a particular security invests a single portion, at one point in time, as opposed to investing smaller portions, over the course of time. The idea behind this investment strategy is that the longer your money is invested in the market, the more time it will have to grow. This investment strategy is usually ideal for clients who wish to invest larger sums at one time.
Unlike lump sum investing, dollar cost averaging can be a more affordable and convenient way of investing than lump sum investing. Often, many people don't have large sums of money lying around to invest at one time. One potential benefit of dollar cost averaging is that it allows an individual to finance their retirement through fixed monthly installments; similar to paying a bill. While this strategy may not always produce the optimal returns when compared to lump sum investing, it has proven to be a cost-efficient method of investing when implemented on a regular basis. If you'd like to learn more about the pros and cons of each strategy as well as how they may pertain to your own unique financial situation, feel free to ask me.
Angelo A. Costanza, Financial Advisor
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).