Advantages

• Lowers timing risk: By investing in regular, equal small amounts, it can help avoid trying to time market highs and lows and reduce your risk of investing a large sum at an inopportune moment.
• Helps creates discipline and consistency: Dollar-cost averaging could keep you disciplined—you always know how much you’re investing and when—and help you resist the urge to try and time the market. By sticking to a game plan, you’re encouraging consistent investing habits.
• Scores a potential lower average cost: Because you’re investing fixed amounts over time, when the price of the asset is up you’ll purchase fewer shares, and when the price of the asset is down you’ll purchase more shares. Over time, dollar-cost averaging could help you spend less per share than if you invested outright in a lumpsum if that investment’s price goes down.

Disadvantages

• Potential missed opportunities: By investing in small chunks over time, you might miss potential gains you could have captured if you invested more upfront. On the other hand, you’re also lessening the risk that you’ll lose money over that period too.
• Potential higher transaction costs: If your brokerage charges commissions or fees, the trading costs from the multiple transactions involved in dollar-cost averaging could add up over time, impacting your returns.
• Could be tough to commit to: For dollar-cost averaging to work, you have to keep investing the same amount, but it could be emotionally challenging to maintain the strategy in turbulent markets. When the price of your investment is going up, it might feel frustrating to not invest all at once. And when the price of your investment is going down, you might fear further losses.

Dollar-cost averaging is right for you if: You want a clear investing schedule, you want to avoid the stress and uncertainty of trying to time the market, and you want to reduce the risk of making a large, poorly timed investment. In short, you trade an increased potential for short-term gains (ability to make more money right now) for a reduced chance of short-term loss (the chance you lose money right now).

The easiest way to apply dollar-cost averaging is to set up recurring investments. That way you don’t have to remember to log in to your app and invest, and you’re not even thinking about trying to time the market. Interested in seeing an example of dollar-cost averaging? Check out our beginner’s guide.

Ways to be a tax-smart investor:

• Understand capital gains tax rates: The profits you earn from selling investments are called capital gains. If you hold an investment for more than 1 year, the profit is considered a long-term capital gain, and if you hold for a year or less the profit is a short-term capital gain. Short-term and long-term gains are taxed differently, with the federal tax rates on short-term gains always being higher. It's smart to hold investments for more than a year before selling to score that cheaper long-term federal capital gains tax rate.
• Practice tax-loss harvesting: If you're selling at a loss, you may deduct those losses from your capital gains, which could lower your tax bill. up to $3,000 of capital gains or ordinary income per year with those losses. You could even replace the assets you sold with reasonably similar investments to get the same exposure 30 days after you've sold. The end result is less of your money goes to taxes so more could stay invested and working for you. If you have less than $3,000 in net realized losses, then the total amount of your net realized losses is the maximum ordinary income you can offset for the year. Any remaining losses after netting with gains and offsetting $3,000 in ordinary income can be carried forward to use in future years.
• Invest through tax-advantaged accounts: If your investing goal is to save money for retirement, education, or health care, first consider investing through tax-advantaged accounts, such as a 401(k), an IRA, a 529, and an HSA. These could help you score tax deductions.

Disadvantages of tax-focused investing:

• Complexity: Implementing these tax-smart strategies requires careful planning and ongoing monitoring of your investments' performance. That can take up a lot of time, and without experience and research it could be difficult to make the best decisions.
• Potential lost money: By selling investments to get a tax deduction you could miss out on potential future gains. Or by waiting until the next calendar year to sell investments, the price of the investment might go down.
• Little access to your money: Using tax-advantaged accounts to save and invest for some of life's biggest expenses could reduce your tax liabilities, but you also might give up access to those dollars before retirement age or for non-eligible expenses.

Tax-smart investing could be an option if: You're willing to navigate some slightly complicated investing strategies to take home more of your investing profits. Or if you're saving for retirement, education, or health care and are willing to use an account that comes with tax breaks to help you save more.

This complexity and extra work isn't for everyone. You might want to get help managing your investments or hire a tax professional to advise you on some of these tax-saving strategies.

Advantages

• Helps create discipline: Having a preplanned exit strategy actually minimizes your risk by limiting emotion. By selling a stock once it hits a preset price, for example, you can potentially avoid holding on too long to a rising stock or panic selling a falling stock
• If your investment is up, you could possibly make a profit: Creating an exit strategy could help you find a wise time to turn your gains into cold hard cash.
• If your investment is down, you could reduce your risk: By deciding when to sell, you could minimize the loss associated with market and price downturns, protecting your money from significant losses.

Disadvantages

• Tough to find the right time: If everyone knew the perfect time to sell, everyone would sell then. Picking a selling point is just making an educated guess.
• Legwork to do: Creating an effective exit strategy could require some work, like analyzing markets, reading analyst reports, monitoring your investments, and aligning your financial goals and risk tolerance. All that can be complex and time-consuming.
• Potential lost money: By selling an investment, you’re missing out on possible gains beyond your exit point.

How to create an exit strategy: 3 questions to consider when forming your exit strategy are:

1. How long am I planning to hold this investment? Or when do I need the money?
2. What will I use to measure performance—percentage gained or lost? Total dollar amount?
3. How will I know when it’s time to get out?

Having trouble with the last one? There’s no one-size-fits-all answer. It depends on your own financial situation, how much you feel comfortable losing, and what your research tells you about the investment’s short- and long-term prospects.

Mutual funds and ETFs: If you want to manage your own investments, mutual funds and exchange-traded funds (ETFs) could help you invest in dozens if not hundreds of different assets in a single trade. These funds can be like buying an entire premade portfolio. Plus, these funds normally follow themes, like indexes, sectors, or types of investments. But to get access to these ready-made portfolios, you’ll have to pay a small fee of your total investment, called an expense ratio, to cover the costs for a manager to run the funds.

Target date funds: Target date funds are a hands-off investing option that could help you reach your financial goals with minimal fuss. As the name implies, these funds are designed to help you hit certain time-based financial goals, such as having a set amount of money when you retire, or for when your child starts college.

They’re super easy to try. You just have to select a fund that aligns with your objective. For instance, if you plan to retire in 2050, you can pick a 2050 fund, which will reallocate investments as the fund approaches its target date to reduce risk and maximize returns.

Although these plans are a great hands-off investing option, there are some drawbacks. There’s no way to customize your investment options within a target date fund, and target date funds carry expense ratios, like ETFs and mutual funds.

Robo advisors: A robo advisor is a simple and relatively inexpensive way to get help building an investment strategy and putting it into action. It’s an affordable digital financial service that uses technology to help automate investing, based on information investors provide about themselves, including their risk tolerance and financial situation.

No, it's not an actual robot advisor and, yes, there are still humans involved. "Robo" refers to these services being almost completely digital. "Advisor" covers all the human advisors behind the scenes who offer digital investment advice and account management services for investors.

Fidelity's robo advisor, Fidelity Go^®, has no advisory fee for balances under $25,000 and then 0.35% a year for balances of $25,000 or more, which includes unlimited 1-on-1 coaching calls.

Managed accounts: For a completely hands-off option, you could consider managed accounts. These are personalized accounts that are typically supervised by a financial professional. Working directly with a pro could help you better understand your finances and financial goals, and help demystify some of the more complicated parts of your financial picture, like retirement, taxes, estate planning, and insurance. To work with a financial advisor, you might need to meet certain investment minimums and pay a fee or a percentage of your investable assets.