When the market is having a bull market and the prices of certain securities are going up in value, investing seems easy.
But since all good things eventually end. And sooner or later the market is going to crash. This change does not mean you should not invest. Instead, try this easy strategy.
Dollar cost averaging explained
When you do dollar-cost averaging, you are investing a pre-decided amount of money into a certain investment over a particular period of time. This happens no matter what the market is doing or the price of shares. This will end with you getting lower prices during some months while also getting higher prices in other months.
With this strategy, let’s say you invested $1,000 into SPDR S&P 500 ETF Trust each month. This would have gotten you a total of $12,000 and got 31.84 shares for the average price of $376.88. Over the previous 12 months, the cost of SPY has gone up in value by nearly $100 per share, but if the opposite occurred and we were in a time of declining prices, your average share price would be the same.
When this works
If you could determine exactly when the stock market will go into a bear market, you would perfectly time your sells and avoid losses. And if you understood when it will rebound, you could then get shares back at the perfect time. But timing like this is very hard, and although you could get lucky, most of the time you will miss the mark. Sometimes a little, sometimes a lot.
Dollar cost averaging works during bear markets, flat markets, or bull markets. But it might also be very helpful in soothing your nerves and getting you in line for profits instead of waiting on the sidelines in cash if you are anxious about a market crash.
When the market went down by 34% in March of 2020 because of fears of coronavirus, you might have seen yourself in this kind of scenario. But instead of lasting a long time, the market crash quickly turned around, and shares of SPY are now priced 200% higher — double what they were then.
If you were sitting and waiting for the perfect opportunity, you would still be keeping cash. If instead, you would committed to this form of investing, and slowly put your money into the stock market over the past year and a half, you would have reaped these profits.
Author: Steven Sinclaire