Dollar cost averaging is a favored investing strategy for many reasons. In this clip from "Ask Us Anything" on Motley Fool Live, recorded on June 21, Motley Fool contributor Dan Caplinger explains why he's a fan of dollar-cost averaging even while in bear market territory.
Dan Caplinger: I am a big fan of dollar-cost averaging for just about anything. It can be an individual stock, it can be a fund. It used to be a need to be for funds because, if it wasn't for a fund, it was hard to make the same dollar amount, which is the whole idea dollar-cost averaging is. You come up with whatever amount you are able to invest on a monthly basis, quarterly basis, whatever it is, and then you just do it and you do it regardless whether the stock or the fund price has gone up or down. The idea is that, if you have $100, and you put it to invest in a stock at $100 a share and then you get one share. If you get a 50% drop in stock price over the next month, then the next month when your $100 comes in, that stock's now down at $50, you can buy two shares instead of one share.
That's a good way to deal with bear markets because not only does it keep you invested, it keeps you on track with an, not necessarily automated, but a formulaic way of putting money into the market on a regular basis. It also rewards you because when that stock prices temporarily lower, you buy more shares of it. Over the long run, you tend to buy more when the stock is down, and less when the stock is up. At the end of the day, that often amplifies returns compared to what you would get if you get out of the stock market when stocks are down. I find that to be a useful thing to do, and you can do it now with individual stocks often because you now have fractional shares. There is a lot of brokers that will let you, instead of having to buy whole shares, they'll say, "Hey you've got $100. This stock is $69.22, we'll buy your 1.4, or whatever it is, shares of the stock, and add it to your account." You can do that month in and month out, and it works out.
