Now that you know what investing is, why to do it, the types of investments and what the stock market is, you can now start investing…but wait…where do you start? How much money should you invest? What investing platform(s) should you use? 

In this section, I will be going over dollar-cost averaging and the lump sum approach.

Dollar-cost Averaging

This is involves putting a fixed amount of money towards your investments at predetermined intervals. This method of investing helps investors stick to their plan without second-guessing their decisions or letting their emotions get the best of them when market conditions change.

*Tip: when investing, leave your emotions at the door. Diversification, the process of buying an array of investments (i.e., index funds) rather than just one or two stocks, can help diminish the emotional response to market volatility.

Lump Sum Approach

This is investing money as soon as it is received (i.e, having money be automatically invested whenever you get paid). This method is preferred for investors who are comfortable investing large sums of money all at once.

Conclusion

There is no one perfect way to invest cash every time. Dollar-cost averaging helps reduce the impact of short-term price swings but the downside of it is the opportunity cost of holding onto extra cash. However, if you are having a difficult time deciding, the following may help. In a Vanguard study, it showed that investing a lump sum outperforms dollar-cost averaging 64% of the time over six months and 92% of the time over 36 months, assuming a 60%/40% portfolio of stocks and bonds. In the study, the money was invested over 12 months. Keep in mind that this was just a study and that investors should choose the method that they feel is the most comfortable.

If the thought of putting all your money in the market at once seems too stressful, you don’t have to. Dollar-cost averaging can help investors have a restful sleep and avoid making decisions based on fear.