Even a casual observer of the markets understands that the stock market moves both up and down—often in strong, but short bursts. Investors looking to commit funds to the market may be paralyzed with the fear of investing a significant sum of money just prior to a severe market downturn. However, by standing on the sidelines, investors lose out on participating in the long-term superior returns of the stock market. The issue is one of market timing, and no matter what the currently popular market prognosticator says, it is practically impossible to consistently call market tops and bottoms.
Dollar cost averaging and its variations, such as value averaging, offer investors an alternative to the all-or-nothing approach, allowing them to ease into the market over time, which reduces the timing risk. The mechanical aspects of averaging provide an investment discipline, require no market forecasts, and are relatively simple to initiate.
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