Markets might have had recouped all of the losses this year; however, there is not much to cheer about the market returns so far in 2016.
Where will the markets go from here? Will the deteriorated health of the Chinese economy cause a global market sell off? Will the slow down of the Chinese economy cause another recession in the U.S.? No one can predict precisely. That is why Dollar Cost Averaging strategy is important in this investment climate.
Dollar cost averaging is where you invest the same dollar amount on a regular schedule such as monthly or quarterly, and pay little attention to the ups and downs of the markets.
Assuming $100 is the fixed monthly investment amount to buy Amazon. In the first month, Amazon is worth $25, so four shares can be bought. In the second month, the share price goes up to $33, so only three additional shares can be bought. Finally, in the third month, it is worth $20, so five more shares can be bought. Over the three months, twelve shares have been accumulated for an average price of approximately $25 each.
Because stock prices fluctuate, dollar cost averaging can lower the investment risks since it is very difficult to time the markets. The 401(k) accounts are the best examples to illustrate the power of he dollar cost averaging strategy. From every paycheck, the same amount is deducted and to purchase the assets that have been predetermined.
Dollar cost averaging is a defensive strategy. It lowers the investment risks. Often times, when the markets take a dive, we cry over the paper loss; however, more shares can be bought to lower the cost basis. In the long run, it produces handsome returns.