Investing through direct investment plans (also known as dividend reinvestment plans, or DRIPs) greatly reduces risk, because these plans make it feasible to build holdings over an extended period in a diversified portfolio of stocks.

You can deploy other risk mitigation tactics in combination with DRIPs, as I explain below.

The beauty of DRIP investing is that you can spread risk among a variety of companies and commit your money among various price points. In addition, you get more value for your investment dollar and eliminate brokers.

More than 1,300 companies offer direct investment plans, many of them brand name icons. Plans vary with each company, but generally they make the process easy.

Once investors are enrolled in a company’s DRIP, they can make additional investments by sending funds to the transfer agent with the tear-off portion of the statement that’s sent after each investment. Investments can be as small as $25 and as much as $10,000. Investments can be sent by check, money order or even by automatic withdrawal from the investor’s bank account.

Eliminating the Emotional Factor

DRIPs make it easier to avoid impulsive investment decisions. Market volume tends to increase at market tops and bottoms, pushing prices too far in either direction.

When everyone likes a stock, you want to own it, too. When prices plummet, you want out and so does everyone else. That’s why many people buy at the top and sell at the bottom. DRIP investing helps you win this battle with your emotions.

Since you only need one share to qualify to join most DRIPs, they facilitate a widely diversified portfolio of companies in a variety of industries. Because DRIPs accept small investments, you can afford to send money regularly to buy more shares.

That strategy (dollar-cost averaging, or DCA) helps impose discipline on investing. You decide in advance how many dollars you intend to invest, and how often. You can continue adhering to this schedule, regardless of the market price of your shares at any one time.

Dollar-cost averaging (DCA) is considered a shrewd investment tactic for several reasons:

Reduces Impact of Volatility. By investing a fixed amount of money at regular intervals, DCA helps to spread out purchases over time, reducing the risk of making a large investment at an inopportune moment. This can help to mitigate the effects of market volatility.

Avoids Market Timing. DCA removes the need to time the market, which is notoriously difficult even for professional investors. Instead of trying to predict the best times to buy, investors commit to making regular investments regardless of market conditions.

Psychological Benefits. DCA can help to reduce the emotional strain of investing, particularly during market downturns. Knowing that you are investing consistently over time can provide peace of mind and help to avoid panic selling.

Disciplined Saving. Regularly setting aside a fixed amount for investment fosters a disciplined saving habit, which can be beneficial for long-term financial planning.

Potential for Lower Average Costs. Since investments are made at various price points, the average cost per share can be lower than if you tried to time the market. This is especially advantageous in a fluctuating market.

Flexibility. DCA can be applied to a wide range of investment vehicles, including stocks, mutual funds, and exchange-traded funds (ETFs), making it a versatile strategy.

Compounding Benefits. By consistently investing over time, investors can take advantage of compound interest, where the returns on investments generate their own returns, leading to potential growth over the long term.

Overall, DCA is a practical and effective investment approach for many investors, particularly those looking to minimize risk and build wealth steadily over time.

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John Persinos is the editorial director of Investing Daily.

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