MONEY OBEDIENCE

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If you follow a savings plan that includes investing a certain amount in stocks (or bonds) every month, the price movements of stocks (or bonds) will likely work in your favor in the long run if you do "dollar cost averaging". It is only essential that you follow your savings strategy and put money into your chosen investment vehicle (such as stocks or bonds) on a regular basis.

So what is "dollar cost averaging"? Let's use the example of investing in a stock. "Dollar cost averaging" will lead you to use your periodic savings amount to buy more shares when a stock price is down and lower priced, and it will lead you to buy fewer shares when the stock price is higher and more expensive. The same idea applies whether you invest in stocks, mutual funds, index funds, or bonds. To see an example of how this works, please click here.

With "dollar cost averaging" you choose a specific dollar amount to invest on a regular basis and you stick to that no matter what happens to the market in which you are investing. So, just as you should "pay yourself first" when paying down debt or putting money into a savings account, you should also "pay yourself first" when "dollar cost averaging."

Let me point out here that it is quite possible that at some point you will lose money on paper when stock prices go down. Be aware that even with dollar cost averaging, persistent declines in the price of an investment will lead to losses. But as long as you stick to your investment plan you have a very good chance that you will come out ahead in the long run. All you have to do is make sure that you put the same amount of money into the same type of investment on a regular basis. You can even let your savings strategy run on autopilot. For example, you could have a fixed amount automatically deducted at regular intervals from your pay check or bank account and invest this way.

Please make sure that you check on your dollar cost averaging investment and overall financial situation on a regular basis, that is, not too often, but maybe annually. If you check too often, the movements of the various financial instruments may make you too nervous and may cause you to pull out of the strategy too early to reap the benefits. If you do not check often enough, you will not find problems with your savings strategy should such problems arise. Most financial advisors suggest that you check on your dollar cost averaging investment and overall financial situation about once a year.