DCA may help reduce the risk of volatility, diversify the average cost of shares, and relieve some of the stress that can come with investing. It may also help you become more disciplined about putting your money to work. While the market goes up and down over time, DCA can keep you steadily building your portfolio with the long view in mind.  

In this article, we’ll cover:

• How dollar cost averaging works
• The benefits of DCA
• The downsides of DCA
• Who dollar cost averaging is best for

How does dollar cost averaging work?

The idea behind DCA is simple: you choose a set amount of money to invest at regular intervals over time, such as monthly, bi-weekly, weekly, or even daily. Many people simply set up a recurring transfer from their checking account to their 401(k), IRA, or brokerage account. Every time you put that money into your investment account, you buy more shares of the stocks, funds, or other securities in your portfolio. Because you’re purchasing securities regularly over a long period of time, you’ll automatically buy fewer shares when the prices are high and more when the prices are low. This slow-and-steady investment strategy allows you to spread out your investment purchases over time so the average cost per share is less impacted by market swings. And DCA can help reduce the impact of volatility on your portfolio, too. 

You might think of DCA as the opposite of lump-sum investing, where you put a large amount of money into a security all at once. That requires you to time the market in an attempt to buy at the lowest possible cost and then see your investment’s value rise. Timing the market, however, is both difficult and risky. For example, if you attempt to “buy on the dip,” snapping up shares when the price falls, you could easily mistime your investments. And volatility of particular securities, sectors, and the market as a whole can make predictions tricky.      

Examples of dollar cost averaging

Because you buy shares on a regular basis over time, DCA diversifies the average cost per share of a security. For example, say you want to invest $2,400 in an exchange-traded fund (ETF) this year, so you put $200 into your investment account on the first day of each month. The amount you invest stays the same every month, but the share price of that ETF will fluctuate over time. Say the fund’s share price is $50 per share on January 1; your $200 allows you to buy four shares ($200 / $50 = 4). If the share price drops to $40 per share when you make your next purchase on February 2, you buy five shares that month ($200 / $40 = 5). You just keep buying $200 worth of shares every month; the actual number of shares you buy will fluctuate along with the share price.  

At the end of the year, you’ll have invested a total of $2,400, and the number of shares you own will depend on how the share price has risen and fallen over the course of those 12 months. You can calculate your average cost per share using a formula called the harmonic mean. 

Purchasing shares at a steady pace over time tends to smooth out the price you pay for your investment compared to lump-sum investing, and you may wind up owning more shares in the long run. In the example above, if you’d have put all $2,400 into the ETF on January 1 when the price was $50 per share, you wouldn’t have been able to take advantage of purchasing more shares when the cost was lower in February. 

Benefits of a dollar cost averaging

Diversifying the average cost per share isn’t the only benefit of dollar cost averaging. Because DCA is an automated, disciplined, incremental investment strategy, it can help remove the emotion often associated with investing and allow you to start investing with whatever amount of money you can afford now instead of waiting until you have a large lump sum. It can also help reduce the risks associated with share price volatility and attempting to time the market. 

Key benefits of dollar cost averaging:

• Mitigates the investment risk associated with market mistiming
• Reduces the impact of share price volatility by diversifying the price per share
• Makes investing more straightforward with a fixed, automated investment schedule
• Allows you to start investing sooner with an amount that fits your current budget
• Alleviates the stress that market fluctuations can cause
• Focuses on building wealth over the long term

Disadvantages of dollar cost averaging

Every investment strategy comes with risks or disadvantages, and DCA is no exception. As opposed to lump-sum investing, dollar cost averaging includes what experts call the cash drag, or the amount of time investors hold onto money instead of putting it into the market where it could earn a return. Due to inflation, that uninvested money can lose value over time. Additionally, some people argue that DCA has the same risks as a lump-sum investing strategy, just at a later time. 

Key downsides of dollar cost averaging:

• You may miss out on returns if you hold onto cash instead of investing it 
• You might not be able to invest in higher-price-per-share securities if your brokerage doesn’t offer fractional shares
• It may simply defer the overall risk of investing instead of reducing it 
• It may provide lower average returns than lump sum investing in the short term

Who is dollar cost averaging for?

Like any investment strategy, DCA might not be the right choice for everyone. Consider your existing relationship with investing and how comfortable you are with risk. If you have the funds and risk tolerance to take a chance on a lump sum investment or want to actively manage your investments in the hopes of short-term gains, DCA may not support your goals. 

But for many investors, DCA offers an accessible way to start putting their money to work for their long-term goals. Dollar-cost averaging can be appealing to people who are hesitant about investing, don’t have room in their budgets to invest a lot of money at first, are just getting started with investing, or prefer to take a hands-off approach to managing their portfolios. 

Panicky investors

All investing involves risk, and it’s natural for people to worry about losing money. If the idea of investing makes you nervous, you may be tempted to hold off until you feel the timing is just right, especially during a declining market or potential recession. But sitting on your cash means you could miss out on the gains you could have made by investing. And on the flip side, selling off assets in a panic if the market dips means you lose the opportunity for your investments to regain value when the market eventually rises again.  

DCA removes the stress of trying to time the market. Panicky investors may find that a fixed, automated investment schedule helps them remove the emotion from investing. And they might feel more confident riding out market ups and downs knowing that the average cost of shares tends to be smoothed out by DCA, even when share prices are volatile.

Investors with less money to invest

If investing seems out of reach because you don’t have a large lump sum to start with, DCA can make it more accessible to get started. If you’re saving for retirement, for example, there’s no IRS-mandated minimum for contributing to an IRA or standard 401(k). And if you want to invest in stocks or funds through a brokerage, many offer fractional shares that allow you to put your money to work without having to purchase a full share of a specific security. 

Plus, the regular investment schedule of a DCA investing strategy ensures that investors with less money stay invested even during a bear market, which can mitigate the risk of missing future growth.

Beginner investors

If you’re just starting out, it can be overwhelming to learn the ins and outs of the market and develop an investing strategy. DCA saves you the stress and risk of attempting to figure out the right time to invest. Plus, the practice of investing on a regular cadence can help you build healthy investing and saving habits. Dollar cost averaging can be a smart way to dip your toe into investing while you gain confidence and learn about additional strategies that may fit your investment profile.

“Set it and forget it” investors

While some people are eager to research investment strategies, watch market performance closely, and actively manage their portfolios, it can become quite time-consuming. For those who just want to put their money to work without spending lots of time and energy, DCA can be a relief. You just need to determine your budget and schedule, then set up regular automatic deposits into the investment account of your choice. Dollar cost averaging keeps you in the market consistently with little management required.

Invest regularly for long-term success

The benefits of dollar cost averaging can support a buy-and-hold investing strategy that’s focused on your long-term financial goals. Maintaining a regular investing schedule could help you mitigate the risk of mistiming the market, diversify the average cost of shares over time, and reduce the potential stress of investing. It’s a fundamental part of the Stash Way, our investment philosophy based on investing regularly in a diverse portfolio for the long term. 

With Stash, you can get started with any amount of money and have access to a wide range of stocks and funds with fractional shares. And Auto-Stash makes it easy to stick to your DCA goals with automated investing on the schedule that works for you.

The post What is Dollar-Cost Averaging (DCA)? A Simple Definition appeared first on Stash Learn.

But if you do sell, you’ll be locking in your losses. Here’s an explanation of what that means:

• You initially buy stocks, bonds, and exchange-traded funds (ETFs) at a predetermined share price.
• That price fluctuates on a daily basis, based on what’s going on in the market. That means the price can increase or decrease in value.
• If it increases, you have a gain. If it decreases, that means you have a loss.

What are losses?

Here’s a simple example:

Let’s say you bought $10 worth of shares in an Investment*  on Stash. If the value of those shares increase to $15, you have an unrealized gain of $5. If that same value decreases to $3, you have an unrealized loss of $7.

By buying and holding onto your position, and even adding to it as stock prices go down, you have the potential for more gains over time

Understand, you have a loss on paper, in your account,  but it is not realized until you sell it.

There’s a temptation to sell when the markets go down because you’ve lost money in the short run. That temptation may be particularly strong if lots of other people are selling, and there seems to be a stampede for the exits on a particular stock or fund.

If you follow their example and sell, there is no chance you’ll ever make back the money you lost by selling.

Keep this in mind: When you invest in the market, you should establish a long-term horizon, generally for many years. If you’re investing for retirement, that time frame could easily be 30 years or more.

Buying, holding and investing for the long-term

By buying and holding onto your position, and even adding to it as stock prices go down, you have the potential for more gains over time.

Although it’s impossible to predict the future, if the past is any indication, an investment in a fund that tracks the S&P 500, an index made up of hundreds of the largest companies in the U.S., would have made an average 9.7% return per year* over the period 1928 through 2017 last eight decades.

Of course, that stretch of time contains some very bad years, including the Great Depression, and the more recent financial crisis of 2008. But if investors sell their stocks on the dips, they have no chance of earning back those losses over time.

Should you ever sell?

This is not to say you should never sell. When you own stocks in individual companies that lose money, you may want to consider selling, for example, if that company starts to have serious trouble meeting its earnings forecasts, or if the industry it’s in starts to deteriorate. Then it may make sense to get out.

There can be similar situations with funds, but they are different investments vehicles that tend to spread out risk by owning shares of numerous companies at once.

Some funds focus on specific sectors, for example, technology or retail, and those can tend to be more volatile, meaning their share price can be subject to wide and sudden swings in value. That’s because they focus on one area of the economy.

Others have a broader focus, and may, for instance, follow an index such as the S&P 500, with a large number of companies in numerous sectors.

In the end, you need to research any fund you’re thinking of buying and buy numerous kinds of funds that give you broad diversification in the market. That means you should aim for a variety of assets and asset classes, including stocks and bonds, in developed as well as developing countries. Remember that if you are uncomfortable with the volatility of your portfolio at any given point in time, there’s no need to panic and you have an easy way to reduce risk. You can buy more bonds to smooth out the ups and downs in your returns over time.

Finally, establish a long-term investment strategy that keeps you in the market.

The post Look Before You Sell, Don’t Lock in Your Losses appeared first on Stash Learn.

Buying on the dip essentially means making a purchase of a stock, fund, or some other security after the share price has dropped in value. The drop in price can be caused by some event that affected the company or fund directly, or it can be the result of a drop in the broader stock market.

Numerous stocks and funds lost value in February, for example, when key indexes experienced something called a correction, which happened after they dropped about 10%. Markets soon recovered.

And if you had bought a stock that fell during the winter correction, it’s likely you could have benefitted from rising stock prices in the immediate aftermath.

While buy the dip may seem like a good time to invest, it’s perhaps not as smart a strategy as buying and holding.

Buying the dip vs dollar-cost averaging

Whether it’s ETFs, mutual funds or stocks, buying and holding means you purchase a stock or fund you believe in, and hold on to it for a period of years.

Think of it this way: It’s rarely a good idea to try to time the markets. On average, stocks have returned about 9% over the last 80 years. Going forward, that return is likely to be closer to 5.9%, according to research. By buying and holding, you’re more likely to experience consistent gains over time.

In fact, it could be that you’ll earn just one third as much on your investment by buying on the dips than buying and holding, according to some research. Why? Because you’ll be keeping your investment money in cash for longer periods of time than you might otherwise, waiting for that event when a stock or fund declines in value. During that time, your cash will sit on the sidelines, potentially earning only a small amount of interest in a savings account.

Buying the dips has some other possible problems. It’s hard to know when a stock or the market has reached a bottom, according to some experts, or you might wait too long and buy after a stock has recovered most of its value.

Similarly, you could also be waiting for an extreme event, such as a bear market–when stocks lose 20% of their value or more– for a long time, as they are relatively rare occurrences.

Capitalizing on market drops

That’s not to say buying the dips is always the wrong idea, either.

It might make sense for investors who want to add more stocks to their portfolios, or who think there’s a long way to go with the current bull market, according to some experts.

One strategy to consider is called dollar-cost averaging. That simply means you take a small amount of cash and regularly put it into stocks, bonds or funds on a regular schedule–for example, either bi-weekly or once a month.

By doing that, you not only take the emotion out of investing, but you will sometimes buy on the dips, as well as the market highs. Over time, the highs and the lows should balance each other out.

The post What Does It Mean to “Buy the Dip?” appeared first on Stash Learn.

So how do you save for retirement? It all comes down to time in the market, adjusting for risk and starting sooner rather than later.

Long-term investing vs. short-term saving: What’s the difference?

Investing for the long term is different than investing or putting money aside in a savings account for a rainy day. They’re both ways to put aside money for when you need it — but they serve very different purposes.

A few months worth of ready cash in your savings account is a great part of a personal finance plan. That money will save the day in case of a sudden move or a layoff or when an expected medical bill comes your way. But a rainy day fund kept in one’s savings account is not a very good way to save for retirement.

If you put away $1,000 into a standard savings account and added $100 each month, with an interest rate of 0.06%, you’d only have $66,000 after 35 years

Savings account don’t yield much much interest. In 2017, the average savings account had a mere 0.06% annual percentage yield, according to the Federal Deposit Insurance Corp.

If you put away $1,000 into a standard savings account and added $100 each month, with an interest rate of 0.06%, you’d only have $66,000 after 35 years.

Growth of $1,000 in a traditional bank savings account, for 35 years

When you’re investing for retirement, you’re looking way into the future. Think 25 to 40 years, depending on how old you are when you begin.

That same amount, invested in the market with average annual earnings of 5% for 35 years would be worth $114,000 by age 70.

Long-term investing is also different than investing for a goal five to seven years into the future. An example of this kind of goal is saving for a down payment on a home or a new car.

When we talk about investing in a retirement fund, you need to think forward into a time where you don’t know what the future will hold.

Time in the market

It’s tough to imagine life 35 years into the future. And sure, it may seem overwhelming or too far away to even contemplate planning for. But by starting now with a timeline to get to your goal, you’ll be setting yourself to up capture the lows and highs of the market over time. Plus the money you’ve invested can start compounding.

If you think 25 is too young to start, here’s the difference between putting $1,000 in the market, with monthly contributions of $100, for 35 years versus starting at 35 and investing for 25 years.*

That $114,000 for the person who started investing younger is only $60,000–nearly half as much–for the person who waits 10 years.

Growth of $1,000 for 35 years, compared to 25 years

Of course you shouldn’t be discouraged if you’re getting a later start. You can still get where you need to be. You’ll just need to adjust how much you contribute on a regular basis to get there.

Longer-term goals and risk

Investing will always involve a certain amount of risk. But by building a more diversified portfolio with stocks, bonds and holdings from multiple sectors (tech, energy, blue chips), you’re balancing it out.

The more time you keep your money in a retirement account, the more time you’ll have to weather financial storms too.

Will the market go up and down? YES. The market will go up and it will go down, and sometimes it will trade sideways.

Long-term investors shouldn’t be concerned with timing the market. No one can predict exactly what the market will do tomorrow or next week.

By investing small amounts of money on a regular basis into your retirement account, you’ll absorb more of the bumps in the market.

This is called dollar-cost averaging and it’s an essential part of the Stash way of investing for retirement. Keep adding money on a consistent basis. History has shown that it’s a great way to plan for a warmer future. Pretty comforting, considering we don’t always know what’s around the corner.

Anyone can start investing for retirement — even you

It doesn’t matter how much you get paid or what your net worth is. You’re never too young to start. Take the leap and think long-term. Your future self will thank you.

The post What To Expect (When You’re Investing for Retirement) appeared first on Stash Learn.

This is just one of the worst pieces of advice anyone can give you and there is a misconception around this.

If someone had told me that when I was 23 and putting away as much as I could from each paycheck (and it was very small amounts at first), I’m not sure I would be sitting here writing to 2.7 million Stash subscribers.

The reason we started Stash was to help people learn and invest.

Before we launched we asked hundreds of people how much money they thought they needed to start and everyone had a similar answer: “I don’t know—but I’m pretty sure you have to be rich.”

“Don’t ever let anyone say you can’t be an investor because you don’t have the money to do it.”

This thinking has been ingrained in people because Wall Street caters mainly to the wealthy. And Wall Street’s incentives don’t always align with the average American who is just trying to pay their bills every month.

Don’t ever let anyone say you can’t be an investor because you don’t have the money to do it. We dropped the minimum to $5 so that anyone could start investing. $5 may not seem like much. But it’s a place to start and learn.

Saving a little bit of money on a regular basis adds up. And it makes a lot more sense (and is a lot less risky) than waiting for the day when you have a lump sum to put in the market.

Why is investing small amounts over time a better idea than putting in a big chunk on a single day?

Because you won’t need to time the market, which is a fool’s errand.  Putting in whatever you can afford every week is the best strategy because you’ll buy some when the market is up and some more when the market is down – giving you the average – which has worked well for investors over the last 30 years.  

There’s always that person out there who wants to give you advice because they think they know better or have more money than you. As a self-made, native New Yorker and the CEO of Stash, I want to reassure you — you are doing exactly the right things: learning, investing and building wealth for yourself.

~86% of Stashers are first-time investors.* Every investor was once a beginner investor. We all have to start somewhere. The world has changed and investing isn’t just for the rich anymore.

It doesn’t matter how much money you have or how much your dividends are right now. Over time, small amounts of money grow to bigger amounts. That’s the nature (and power) of compounding. Pennies become dollars. Two digits become three and then four. It’s not magic — it’s patience and a sound strategy.

It doesn’t matter how much you get paid or what your net worth is. You are taking the right steps to build your Stash. Think long-term and keep it growing. And remember, it’s never too late to start. 

Keep it up. You are our heroes.

Stash on,

Brandon Krieg

The post Stash CEO: People Who Say You Need a Lot of Money to Invest Are Wrong appeared first on Stash Learn.

Will the market go up and down? YES. The market will go up and it will go down, and sometimes it will trade sideways. Right now the markets are facing some political noise. And often with noise comes volatility, or turbulence.

Long-term investors shouldn’t be concerned with timing the market. I’ve said this before and I’ll keep saying it — no one can predict exactly what the market will do tomorrow or next week.

No matter what the market does, continue to buy small amounts of your investments on a regular basis.

I’ve invested through a lot of market cycles and trust me, if an investment professional tries to sell you on a magic formula to crack the market, I recommend contacting the U.S. Securities and Exchange Commission immediately.

No matter what the market does, continue to buy small amounts of your investments on a regular basis. This is called dollar-cost averaging and it’s really important.  On Stash, we have $5 investment minimums so you can consistently buy small amounts of your investments.

Consider market fluctuations as opportunities to continue adding to your portfolio at lower prices. If the market keeps dropping, keep adding those little amounts. If the market goes up, keep adding those little amounts.

Take a look at these examples from the last 10 to 20 years:  

The past 15 years have been turbulent and these charts reflect how the market responded. You’ll see gains and declines through the dotcom bust, 9/11, the Great Recession, wars in Iraq and Afghanistan, and three separate presidential administrations. But staying the course has proved to be the way to go.

Imagine if you’d bought small amounts of these investments all through these ups and downs. You would have harnessed the gains from when the market was up, and bought more when the market was down.

My point is that no one could have predicted these past events. And no one can predict the future. Investing consistently over time is a strategy you can use for the long term.

We are your investment adviser and our interest is in looking out for you, helping you to save and invest. Although we can’t predict the future, try not to sweat the ups and downs.

Turn on Recurring Transactions to make sure you keep investing through every market cycle.

It’s all about the time you are in the market that counts, not how you time it.

Keep Stashing,

Brandon Krieg
CEO, Stash

The post It’s All About Time in the Market, Not Timing the Market appeared first on Stash Learn.

We’re guided by three principles we call The Stash Way.

• Choose individual stocks and funds that reflect your goals and beliefs.
• Buy and hold. Investing is a long-term game.
• Turn on Recurring Transactions to keep adding to your Stash on a regular basis. It will keep you on track to reach your goals.

Buy and hold

At Stash, we believe that you should invest for the long term. After all, you are investing for your future, right? Stash isn’t about trading, or getting rich quick. We believe in getting cozy with your investments, and watching them grow over years, and even decades.

Which will mean buying and holding them through ups and downs.

Recurring Transactions. Invest automatically

With Recurring Transactions you can thoughtfully choose how much and how often you want to invest, but then let the power of automation do the heavy lifting.

Consider this auto-investing in yourself and for your future. Recurring Transactions makes investing easier than ever. You choose how much you’d like to invest ($5, $10, $100?), how often you’d like to invest (every week, every other week, once a month?), and where you’d like that money to go.

You set it in the app and the transfer happens automatically. No need to remember to do it.

Recurring Transactions is so effective that investors with Recurring Transactions turned on are almost tripling their Stash deposit rates when compared with their non-Recurring Transactions counterparts*.

Ready to start investing?

The post Intro to Stash: Everything You Need To Know To Start Investing appeared first on Stash Learn.