The last seven months have been truly wild in the world of stock trading. The market collapsed in March following the coronavirus pandemic. Then stocks recovered to face a big sell-off early September. The stock market actually jumped a lot in October, and as we got closer and closer to the upcoming election, we could see more volatility.
As an investor, that places you in a tough spot, so if you’re worried about handling your portfolio during these tough times, here’s one solution worth considering: average dollar-cost. It’s a tactic long promoted by investment legend Warren Buffett, and it’s a sure bet to survive a competitive market like the one we’re in.
How The Averaging Of The Dollar Cost Works
The definition of dollar-cost average is simple: select some stocks, find out how much you can afford to spend, and then purchase shares at predetermined intervals. For example , assume you decide to buy Netflix (NASDAQ: NFLX) and devote $200 every two weeks to its shares. (Technically, $200 isn’t enough to purchase a full share of Netflix right now, so you can purchase fractional shares instead.) In that case, you’d acquire Netflix every week or so, regardless of the value on the day you buy your shares.
The average dollar-cost concept is that while you will overpay for shares for weeks, you will also underpay other weeks. All told, all things should work in your favour, because you’re eventually paying a lower price per share.
Dollar-cost average is a much better bet than timing the market during times of uncertainty, since you could miss great buying opportunities and risk stuck with a higher overall share price. Remember, a good week’s stock market is volatile, but when we’re in the middle of election season, it can be much wilder. And being consistent at such a time is important.
Of course, if you’d like to take Buffett’s advice further, use dollar-cost average to purchase S&P 500 index funds shares. So you get exposure to the wider market and don’t put all your money into one stock. Buffett has mentioned several times that index funds are a perfect way for the average investor to grow money, so if you don’t want to do the legacy of vetting individual stocks, index funds are the way to go.
A man with Buffett ‘s investment track record is someone to take seriously. If you’re looking to buy in the coming weeks, it’s worth using dollar-cost average instead of attempting to time the market in an attempt to score the lowest stock prices. A secure, steady approach is not only a safer bet, but most likely a more profitable one as well, considering the way stocks might swing in the near term.
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