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Dollar-Cost Averaging

Taxes Blog - JLFranklin Wealth Planning

Dollar-cost averaging (DCA)—investing the same fixed amount of money in a particular fund (or portfolio) at regular intervals—is a technique that helps you avoid the risk of putting all your money in the stock market at the wrong time.

If the stock market is rising, dollar cost averaging will be disadvantageous. Of course, we do not know the direction of the stock market in the short term. We often recommend DCA for risk-averse clients to deploy large amounts of cash into a portfolio. Those who already have exposure to the market should retain it, rather than try to time getting out and then back in to the market. (It’s extremely hard—if not impossible—to successfully time the market.)

If you choose a DCA strategy, we will add cash to your portfolio at regular intervals that you will determine in advance. Common DCA investment intervals are 3, 6, 9, or 12 months. Keep in mind that the more often you buy securities in a DCA strategy, the more you will incur trading fees, typically $30 per mutual fund for our clients trading at Charles Schwab. These fees, along with the risk of missing a rising market, are the big downsides of DCA. As fiduciary advisors, we are always fee- and tax-conscious when investing our clients’ money.

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