It can be tempting to think you can avoid stock market volatility by selling your investments and buying them back when things settle down. But it can be very difficult to pinpoint market bottoms or tops. Things can change fast, and missing part of a rebound could have you buying back your investments at a higher price than when you sold them. That would be selling low and buying high.
But if you invest regularly over months, years, and decades, you may benefit from a volatile market.
The benefits of dollar cost averaging
Investing regularly is a time-proven investment technique called ”dollar cost averaging.” You simply invest a set amount every week, month, or quarter, regardless of how the market’s doing.
The good news: That’s exactly what you do when you contribute steadily to your UC 403(b), 457(b) and/or DC Plan account.
By contributing steadily over the years, you’ll buy more shares of each investment option when prices are low, and fewer when prices are high.
As a result, the average price per share of your investments may be lower than if you invested all your money at once. More importantly, you avoid the temptation of trying to time the market. (Periodic investment plans do not ensure a profit or protect against a loss in a declining market.)
Dollar cost averaging in action
Investing a fixed amount at regular intervals is one way to deal with the inevitable dips and gains in the stock market. Imagine you contribute $100 each month, and invest it all in a single fund.
As this table shows, dollar cost averaging can result in a better average share price than trying to time your purchase.
|Month:||Your contribution is:||Your fund's share price is:||So your contributions purchase:|