Volatility and Investing

Volatility can be hard on any investor.  The most devastating reaction to the ups and downs of the market can be those of the emotional kind.  Most investors do not understand that it is all about your time in the market, and the ups and downs are inherent of the decision to invest.  Nevertheless, people tend to follow there emotional reaction and change their investment strategy according to these peaks and valleys, which is an almost surefire way to ensure that a person will not fare well in any market.

There is a strategy, however, to smooth out these ups and downs.  Dollar-cost averaging is a method of investing your money in fixed amounts on a regular basis over a period of time.  Once this strategy is utilized, investors buy shares of a security (ie. mutual funds) at various prices. Theoretically, when the share price falls one would purchase more shares for the same security providing a greater opportunity to benefit when share prices rise and could result in a lower average cost per share.  The long term effect of this strategy provides investors with a "smoother" ride during their market experience and volatility will not be as dramatic.

Dollar-cost averaging does not ensure against loss however.  It is just a means of purchasing an investment at various prices and mitigating the effect of volatility.  For the less experienced investor this can be very important though, as these individuals tend to be more influenced by price movement.  All investments are subject to market fluctuation, risk, and loss of principal, but this strategy can be an effective way for investors to accumulate shares to help meet long-term goals.

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