Basic Investing 101: The Strategy Every Investor Should Know

I'd say the first thing to learn if you want to start investing is dollar cost averaging. This means investing the same amount for a certain period of time, such as a month, several months, or a year. As an example, pretend you invested $100 a month. By investing the same amount every month, you are not jumping in and out of investments at the worst time.

In effect you are preventing your investing plan from trying to time the market, thus saving yourself from the losses associated with trying to time the market. Dollar cost averaging forces you to buy more when a stock is low and buy less when it is high.

The truth is that the market is unpredictable and no one can truly determine when it's at a peak of or is about to shoot back up. This is the same with any stock. Because of this, we can deduce that the market is volatile and constantly moving upwards or downward. The only way to profit from such an environment is to be invested long term, ready to ride out the rough patches in order to reap benefits later.

A strategy constantly jumping in and out of the market will not be profitable, and can't be relied on consistently. By implementing Dollar Cost Averaging, you are always adding to your investing plan and letting your investments compound instead of pulling them out prematurely. However, you are resisting paying too much because you have set a consistent number for every month. So if the market is near the top, you are buying less shares. But as the market drops and nears the bottom, that same dollar amount is able to get you more shares for the money.

For example, let's say you are investing $100 a month. When a stock is at $10 a share you are buying 10 shares. Now if the stock is up to $50 after a month, you are only buying 2 shares because you are forcing yourself to invest the same amount. If the price is down to $5, you can buy 20 shares. See how we are buying low and selling high, instead of trying to buy all at once and regretting selling too early or buying too late.

Dollar cost averaging is a great place to start, for ANY investing plan. I hope you can see just some of the benefits of such a strategy, as I've laid out here. I wish you the best in your path to investment education.

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