Stressed About Timing Your Investments? There’s Another Way

Life these days can feel pretty unpredictable. Navigating the fickle stock market may be the last thing you want to do.

But investing your money doesn’t have to require a lot of guesswork. There are ways to make it more hands-off and still get where you want to go.

One strategy is what’s known as dollar-cost averaging, a very systematic approach that involves investing a fixed amount of money at regular intervals, regardless of what the stock market is doing. (Think 401(k) contributions.) Here’s more on how it works, reasons for using it (or avoiding), and who may benefit the most.

Dollar Cost Averaging: The Same Amount No Matter What

Dollar-cost averaging is simpler than the name might suggest. If you commit to investing the same dollar amount at regular times — maybe $50 every Friday or $250 on the 1st of the month — you remove any need to decide when to invest. You still have to decide what to invest in (though you can pre-select that too), but the timing part is often the most daunting.

A regular investment schedule can help you resist the pressure or temptation to predict market movements, which is a difficult task even for seasoned stock investors. The discipline helps to maintain a steady course, reducing the likelihood of panic selling during downturns or impulsive buying during rallies.

In other words, you don’t have to worry you’re missing out on a good deal during a dip or overpaying when the market is going up. The idea is to emphasize consistency over timing so you have a reliable path to building wealth despite any market noise or media hype.

Putting Time in the Market Over Timing the Market

One of the primary reasons to use dollar-cost averaging is to lower your average per-share cost over time. The same $100 will buy more shares when the price of each share is low and fewer shares when it’s high, but hopefully, in the end, you’ve paid less per share than if you’d bought all your shares at once.

Put another way, you’re smoothing out the impact of market changes and minimizing the potential downside of investing a lump sum at the wrong time.

Dollar-cost averaging assumes one of the core tenets of investing for retirement, college tuition or any other long-term goal: the longer you stay invested — riding out any inevitable ups and downs — the more likely you are to earn a return on your money. The benchmark S&P 500 Index, for instance, has averaged an annual return of about 10% (6%-7% if you adjust for inflation) over time.

It also leverages the power of compound returns, where your returns (the money you earn from your investments) generate their own returns, creating a snowball effect that can boost your wealth over time.

A Way to Build Healthy Habits

Automating your investments can be a powerful tool for maintaining discipline and consistency and can be particularly useful if you’re just starting to build your portfolio.

Setting up weekly, monthly, or quarterly transfers into an investment account helps to build a habit of investing, making it a natural part of your financial management. It also removes the urge to spend that money on something that won’t benefit you as much, and the possibility that you’ll forget to make an investment. (It’s not like forgetting to take your dog out, where you know once you’ve done it.)

Plus, taking the guesswork out of things does more than just remove angst. It can also provide a real sense of security and control.

(Here at SoFi, we’re even contributing a 1% match to SoFi Plus members who set up recurring deposits to any SoFi Invest® account, including accounts with robo advising.)

The Trade-off

Dollar-cost averaging isn’t for everyone. If you’d hate to miss out on big upturns in the market, it may not be the right strategy for you. This trade-off is essential to understand, because in the end, investing is a balancing act between risks and rewards.

Your approach to investing is as personal as anything else, and whether to rely on dollar-cost averaging or lump sum investing comes down to your appetite for risk and why you’re in the market. Ask yourself if you’re driven by maximum returns and what’s just ahead or by predictability and the long horizon. Timing the market just right may be more lucrative, but your peace of mind may often be worth more.

Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.

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