Dollar Cost AveragingAn Automatic Investment Plan (AIP) lets you automatically transfer a preset amount of money from your bank account into a fund you choose at regular intervals. You determine how much you want to invest, and how often. In doing so, you purchase shares of the fund at its then current share price. Once you start your plan, it continues to make investments automatically, so you don't have to worry about it. You work toward your goals step by step, consistently, over time.
In addition to helping you organize the process of investing, an AIP offers several important advantages that may boost your chances of reaching your important goals.
You "pay yourself first."Because it's automatic, an AIP ensures that you attend to your long-term goals before you're tempted to spend those assets on a new suit or a set of golf clubs. An AIP gives investing for your future the same importance as your other periodic payments your monthly bills, for example. As a result, you're much more likely to stick with your plan until you reach your goal.
You may reduce your average cost of investing.When you invest the same amount in a fund at regular intervals over time, you potentially buy more shares when the price is lower and less shares when the price is higher. Over time, you may reduce your average cost per share over time. This strategy, called "dollar cost averaging," helps make market fluctuations work for you, and reduces the risk that you'll invest all your money right before a market downturn.
Dollar cost averaging offers its greatest benefit with investments that tend to regularly fluctuate in price, which is why Automatic Investment Plans can be especially effective when used in conjunction with stock funds. The share price of these funds can vary widely, but, through dollar cost averaging, an AIP can help make this volatility work for you. You gain access to the stock market's growth potential, and you may reduce your cost of investing over the long term. Our Dollar Cost Averaging Calculator can provide you with examples of how an automatic investment plan can effect your investments in different market conditions.
You should keep in mind that dollar cost averaging can't guarantee a profit or protect against a loss in a declining market. So choose an amount you feel comfortable investing under all market conditions.
You don't put off investing.It's easy to delay investing until you believe the time is "right." But putting off investing means you're not utilizing one of the most potent benefits available to long-term investors: the power of compounding. When you reinvest your dividends and capital gains, they can add considerably to the growth potential of your investment over time. And the longer you invest, the greater the effect of compounding becomes:
Try our "Power of Compounding" Calculator to see how your investment may grow and compound over time.