Investing would be a whole lot easier if you could predict when markets went up and when they went down. Then, you could just buy when prices were low and sell when they were high. Unfortunately, not even telephone psychics can do that. Some investors also attempt to time the market and get in when they think the time is right and get out when it isnt. Sometimes this works, but a lot of the times it doesnt. Instead, a better approach would be to use dollar-cost averaging.

Bottoming Out

As everyone knows, stocks, bonds and cash equivalents constantly rise and fall over time. But when they hit their lowest point in a given time period, they have bottomed out. Obviously enough, this is the point at which people start getting all jazzed up about getting back into the market. They can get shares of investments for relatively inexpensive prices compared to when they were high. And they have hopes that their investment account balances will soon start to rise because it appears that it is only up from that point forward.

But, to every investors dismay who thinks they know when a security has bottomed out, sometimes it goes even lower! Figuring out exactly when to get in at this most hallowed of times is pretty difficult. However, there is one method that is accepted almost industry-wide to combat this problem: dollar-cost averaging.

How to Start Dollar-cost Averaging

This concept is pretty straightforward and simple. You begin by putting equal amounts of money into the market at regular intervals. This could be $500 per month over a span of 12 months or $1,000 per week over 10 weeksor pretty much any dollar amount over any time period that you so choose. Then, as the markets fluctuate throughout the set time frame, your investments will more than likely be purchased when the market is high as well as when it is low because you have been purchasing investments regularly.

Why its Effective

Dollar-cost averaging is effective because over time markets have trended upwards. This isnt to say that that markets will go up every year, but in the article Is the 7 percent Return of Stocks Extinct , the author notes that [s]ince 1926, the S&P 500 has produced an annualized total return (including capital gains and reinvested dividends) of 6.6 percent, after inflation. By constantly investing at regular intervals you are giving yourself a better chance to buy when the markets are high as well as when they are low, rather than just when they are high.

Maybe you are already doing it

People who have 401k accounts through their employer are already doing this as their money is invested in the market on a predetermined schedule. This might be on the 1st and 15th of the month for workers who are paid semimonthly or on the last day of the month for those who are paid just once a month.

For those of you who dont have 401k accounts, dont worry, you have the opportunity to dollar-cost average through IRA accounts and/or taxable investment accounts as well. Simply set up an account through a financial institutionI recommend a discount brokerage firm such as Vanguard, Fidelity, Schwab, etc.and then start making periodic investments on a regular basic.

Conclusion

Finally, dollar-cost averaging is not always the most profitable way to invest large sums of money as some people may be lucky enough to put down a boatload of money into the market right when it does bottom out. But for most people, it is a useful strategy as it helps minimize the risk of only investing when the markets are high.