Investors seek high stock prices when they sell, but not when they buy. As investors wait for a decline, they get lured away from the markets and become tangled in the slippery slope of market timing, which is not 💮advisable for a long-term investment strategy.

Two invest෴ing practices that seek to cou꧒nter the natural inclination toward market timing include dollar cost averaging (DCA) and value averaging (VA).

Dollar-Cost Averaging

When choosing 澳洲幸运5开奖号码历史查询:dollar cost averaging (DCA), an investor allocates a set amount of money at regular interv🐟als, usually monthly or quarterly. DCA is generally used for more volatile investments such as s🌼tocks or mutual funds, rather than bonds or CDs.

DCA is a good strategy for investors with lower 澳洲幸运5开奖号码历史查询:risk tolerance. Investors who put a lump sum of money into the market at once, run the risk of buying at a peak, which can be unsettling if prices fall. The potential for this price drop is called a 澳洲幸运5开奖号码历史查询:timing risk. With DCA, that lump sum can be 澳洲幸运5开奖号码历史🍸查询:invested into the market in a smaller amount, lowering the risk and effects of a sin𓆉gle market move by spreading the investment out over time.

For example, an individual invests $1,000 each month for four months. If the prices at each month's end were $45, $35, $35, and $40, the average cost would be $38.75. If they had invested the whole amount at the start, the price would have been $45 per share.

Value Averaging

澳洲幸运5开奖号码历史查询:Value averaging (VA) aims to invest more when the 澳洲幸运5开奖号码历史查询:share price falls and less when the share price rises. Value averaging is conducted by calculating predetermined amounts for the total value of the investment in future perio🍸ds, and then by investing♔ to match these amounts at each future period.

Suppose an investor determines their investment will rise by $500 each quarter as they make additional investments. They invest $500 at $10 per share first for 50 shares. They determine the investment will rise to $1,000 in the next period. If the 澳洲幸运5开奖号码历史查询:current price is $12.50 per share, the original position is worth $625 (50 s💖hares times $12.50), which only requires an investment of $375 to reach $1,000. This is done until the end value of the portfolio is reached. The individual invested less as the price rose. The opposite would be true if the price had fallen.

Example

The chart indicates that a majority of shares are purchased at low prices. When prices drop and individuals invest more, they acquire more shares. Most of the shares have been bought at low prices, thus maximizing returns when it comes time to sell. If the investment is sounꦯd, VA will increase returns beyond dollar-cost averaging for the same period and at a lower level of risk.

If there is a sudden gain in the 澳洲幸运5开奖号码历史查询:market value of a stock or fund, value averaging could even require investors 🥂to sell some shares. Overall, value averaging is a simple, 𝔉mechanical type of market timing that helps to minimize some timing risks.

The Bottom Line

The DCA approach is simple to implement and follow. For investors seeking maximum returns, the VA strategy is preferable. Choosing DCA versus VA depends on an individual's investment strategy. If the 澳洲幸运5开奖号码历史查询:passive investing aspect of DCA is attractive, investors can put in the same amount of money monthly or quarterly. If investors prefer 澳洲幸运5开奖号码历史查询:active investing, value averaging may be a better choice. In both strategies, investors choose a buy-and-hold methodology, finding a stock or fund and selling it only if it becomes overpri𒅌ced.

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