What are the strategies for psychological investing？
Two of the most popular approaches to investing, including dollar-cost averaging and diversification, can take some of the guesswork out of investment decisions and reduce the risk of poor timing due to emotional investing.
- Dollar-cost averaging
Dollar-cost averaging is the practice of systematically investing equal amounts of money at regular intervals, regardless of the price of a security. This strategy can be implemented in any market condition. In a downward-trending market, investors are purchasing shares at steadily decreasing prices. During an upward trend, the shares previously held in the portfolio are producing capital gains and, since the dollar investment is a fixed amount, fewer shares are purchased when the share price is higher.
Diversification, which is the process of buying an array of investments rather than just one or two securities, can also help diminish the emotional response to market volatility. After all, there are only a handful of times in history when all markets have moved in unison and diversification provided little protection. In normal market cycles, using a diversification strategy provides an element of protection because losses in some investments are offset by gains in others.