What is dollar-cost averaging?
One of the easier investment strategies to consider is dollar-cost averaging. There are three simple tactics that allow investors to build an investment portfolio by systematically committing dollars over time.
Director of Portfolio Management
One investment approach that has proven over time to be worth considering is dollar-cost averaging. By dollar-cost averaging, individuals can systematically commit dollars over time to build a potentially strong investment portfolio.
What is dollar-cost averaging?
The concept and practice are simple: Commit generally the same dollar amount or percentage of dollars to investments on a regular schedule. Dollar-cost averaging gained popularity as a simple and effective investment approach after the introduction of employer-sponsored retirement plans. At the direction of the employee, employers would deduct a specific dollar amount or percentage from each paycheck to be invested in a variety of investment options within a retirement account.
Individual investors have since expanded the dollar-cost averaging approach beyond their retirement plan dollars. This is a potentially good option based on history. Investments, by definition, are subject to ups and downs as corporate profitability is impacted by changes in global growth. Over the years, global economies have experienced periods of expansions and contractions. Investing systematically over time provides an opportunity to take advantage of the ebbs and flows of global markets.
Even with downturns in markets such as the market drop of 1987, the 2007/2008 “Great Recession,” and the more recent global pandemic, regular investing can pay off in a big way. Huntington Private Bank wealth advisors can provide the advice and guidance needed to establish a dollar-cost averaging approach, select the appropriate investment options, and periodically review the progress toward long-term goals.
"Dollar-cost averaging can be a simple and effective approach clients of all levels should consider as part of their portfolio planning."
Vivian Hairston, MBA
Director of Portfolio Management, Huntington Private Bank®
Dollar-cost averaging compared to other investment approaches
Dollar-cost averaging has three common approaches to building an investment portfolio, each with specific benefits that could fit your unique situation.
1. Dollar-cost averaging – Set it and forget it
A simple, yet still very effective way to benefit from dollar-cost averaging is to invest, either a specific dollar amount or percentage, on a regular basis, such as with each paycheck. Once the investment method has been established, the process takes little effort, and reduces the temptation to time the market. This tactic promotes discipline and is attractive to many people as a large initial deposit isn’t needed.
2. One lump sum
Depositing one large initial deposit may not be an option for all, but one important benefit of this approach is that the deposit will quickly begin to garner whatever returns are due, as opposed to taking weeks, months or even years to become fully invested. Even though the initial deposit ties up those funds, the investment returns on the entire portfolio begin immediately.
It must be noted that the same investment would be subjected to whatever losses do occur. If the markets take a dive, or worse, drop for an extended period of time, losses could occur before the investor could sell. On the other hand, with the set and forget method, the investor likely could stop their regular investment strategy within a month or so and avoid further losses.
3. A points system
A slightly more complex practice would be to tie some of your investments to when an index, such as the S&P 500 rises or drops to a certain point. As an example, if the S&P drops to 5,500, you could plan on investing 10% of a certain account, which would allow you to buy at a less expensive price. You can set up various “percentage buy points,” such as investing 15% if the S&P 500 drops to 4,750, or investing even more, say 20% if it drops to 4,500.
Getting the advice you may need
Investing doesn’t have to be complicated, and dollar-cost averaging is a very simple way to get started. Whether you invest a little with each paycheck, or a lump sum, letting your money work over time can bolster your portfolio. Connect with your Huntington Private Bank wealth advisor to discuss a few tips that are easy and affordable. To learn more, please contact your Huntington Private Bank team to see how we can help, or find a Huntington Private Bank Office near you.
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