If you started investing at the stock market top, you are only down 3% with dollar cost averaging
If you started investing at the stock market top, you may be feeling a bit discouraged. After all, the market has been volatile lately, and it can be hard to see your portfolio value drop. However, there is a strategy that can help you weather the storm: dollar cost averaging. Dollar cost averaging is a simple but effective investment strategy. Instead of investing a lump sum of money all at once, you invest a fixed amount of money at regular intervals. This can help smooth out the ups and downs of the market and reduce the impact of market volatility on your portfolio. Let's say you invested $10,000 in the S&P 500 index at the market top in February 2020. By March 23, 2020, the market had dropped 34% due to the COVID-19 pandemic. Your $10,000 investment would have been worth only $6,600. However, if you had used dollar cost averaging and invested $1,000 per month for 10 months, your total investment would have been $10,000. By the end of December 2020, your portfolio would have been worth $9,700, a loss of only 3%. This is because dollar cost averaging allows you to buy more shares when prices are low and fewer shares when prices are high. Over time, this can help you achieve a lower average cost per share and potentially higher returns. Of course, dollar cost averaging is not a guarantee of success. It is important to choose a diversified portfolio of investments and to have a long-term investment horizon. You should also be prepared to weather market downturns and not panic sell during times of volatility. In conclusion, if you started investing at the stock market top, don't despair. With dollar cost averaging, you can still achieve positive returns over the long term. Stick to your investment plan, stay diversified, and be patient. The market will inevitably have its ups and downs, but with a sound investment strategy, you can come out ahead in the end.