Dollar Cost Averaging Versus Stock Market Timing
There are two common methods for market timing discussed in most stock market 101 courses. The first of these involves stock market timing. This is essentially stock trading though it may have fundamental investing elements involved as well. The other is dollar cost averaging which involves purchasing equal amounts regardless of the current market conditions in a routine fashion. There is no easy learn stock market technique that makes one version better than the other. They each have their own merits and perils.
Dollar Cost Averaging
Dollar cost averaging is simply putting X amount of money into your investment each month or year routinely. That way if the stock market is down you purchase more shares of the investment and when the stock market is up you purchase less shares. This keeps you from every having all of your money in really bad buys, but it also prevents you from getting too much invested in great buys. As the name says you end up average. This technique is good because it is simple and works well with retirement plans. You can really boost this method with adding a dollar cost selling element to your investments too. This gets you out of some of your stock as it increases, and buys more when it decreases. This is sometimes referred to as automatic investing.
Stock Market Timing
There is no timing technique that should be used when you’re in stock market 101 mode. When you add an element of timing you are moving from “saving for retirement” to “investor.” This is a big move because it involves making more decisions that could greatly increase or decrease your return on investment instead of leaving those decisions for professionals. The timing techniques I recommend for newcomers is using basic fundamentals to determine which stocks are worth considering (price to earnings ratio, debt to equity, etc) and very simple technical indicators (moving average, volume trends.)
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