How the cost averaging works when you invest $10,000 in a lump sum or 10 monthly investments of $1,000

The decision to invest money all at once or gradually occurs while thinking about investing. If you choose the latter option, you may be choosing a method of investing known as cost averaging. Averaging or SIP allows you to invest your money consistently and in equal amounts regardless of market fluctuations.

Consider you had $10,000 in savings or a windfall to invest. Cost averaging allows you to divide a $10,000 investment into ten monthly investments of $1,000 rather than making the entire investment all at once.

Without even realizing it, you may already be averaging. If you have a 401(k) or similar type of defined contribution plan, your contributions are distributed on a regular, fixed schedule to one or more investment options, regardless of market performance. You average out every time this happens.

Stock market movement is unpredictable and trying to “time the market” has proven to be an exercise in futility. Instead, strive to follow the ‘time in the market’ approach. The longer your money is invested in the stock market or in stocks, the better the potential for generating higher inflation-adjusted returns.

The DCA or Systematic Investment Plan (SIP) is suitable for any investor who has a steady flow of income such as salaried individuals. From the income received each month, one can start investing a fixed sum in stocks, ETFs or mutual funds.

Buying low and selling high remains the best stock market principle, but it is never put into practice. If your stock or ETF is fundamentally sound and you want to hold it for the long term, then with every price drop or correction, it’s best to buy more. The DCA approach is the best way to apply it in practice.

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Often when stocks go down, people get scared and sell. They can therefore lose any gains when the market rises again. On the other hand, investors may have an incentive to intervene when the stock market rises. However, they could end up making a purchase if the markets were to go down.

The cost average can help investors detach themselves from their emotions. This forces you to keep investing the same amount despite market changes, helping you resist the need to time the market.

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Buying more shares of an investment when the stock price is low and fewer shares when the stock price is high is known as average purchase. Over time, this can lead to paying a lower average price per share. Averaging can also help limit your losses in the event of a market crash by allowing you to invest gradually rather than all at once.

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