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Timing the Market vs. Dollar Cost Averaging

If you takes the extremes out to their most extreme points, there are 2 different ways to invest. One way is timing the market. That is, you try to figure out when the market is at its lowest and then you buy stocks. Conversely, when the market is at its highest, you try to sell and take profits.

The other side is dollar-cost averaging. These people think that timing the market is way too difficult or perhaps even impossible and so instead of trying to guess the highs or the lows, they simply buy (or in retirement: sell) the same amount of stocks each month, usually in the form of mutual funds or ETFs (exchange traded funds). The theory is that you’ll get more shares when the market is down and less shares when the market is up, but that it will all even out in the end. It avoids the “emotional” chaos that causes people to do crazy things like sell everything when the market is at its lowest point.

What do I like? I try to time the market, but it’s not really for the faint of heart and bad for those that get scared by market fluctuations. Over the long-term, if done well, market timing has the potential to offer excellent returns. But, greed and fear: while they will certainly be felt, but they must not be acted upon, no matter what. Another reason that I try to time the market is mostly because I buy individual stocks and it’s really hard to dollar-cost average this way. This method is far better suited to something like mutual funds.

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