What Is Dollar-Cost Averaging?
The dollar cost averaging strategy is one of the best strategy to implement in your investing. Investing can be challenging. Even experienced investors who try to time the market to buy at the most opportune moments can come up short.
Dollar-cost averaging is a strategy that can make it easier to deal with uncertain markets by making purchases automatic. It also supports an investor’s effort to invest regularly.
Dollar-cost averaging involves investing the same amount of money in a target security at regular intervals over a certain period of time, regardless of price. By using dollar-cost averaging, investors may lower their average cost per share and reduce the impact of volatility on the their portfolios.
In effect, this strategy eliminates the effort required to attempt to time the market to buy at the best prices.
Dollar-cost averaging is also known as the constant dollar plan.
KEY TAKEAWAYS
- Dollar-cost averaging is the practice of systematically investing equal amounts of money at regular intervals, regardless of the price of a security.
- Dollar-cost averaging can reduce the overall impact of price volatility and lower the average cost per share.
- By buying regularly in up and down markets, investors buy more shares at lower prices and fewer shares at higher prices.
- Dollar-cost averaging aims to prevent a poorly timed lump sum investment at a potentially higher price.
- Beginning and long-time investors can both benefit from dollar-cost averaging.
Benefits of Dollar-Cost Averaging
- Dollar cost averaging can lower the average amount you spend on investments.
- It reinforces the practice of investing regularly to build wealth over time.
- It’s automatic and can take concerns about when to invest out of your hands.
- It removes the pitfalls of market timing, such as buying only when prices have already risen.
- It can ensure that you’re already in the market and ready to buy when events send prices higher.
- It takes emotion out of your investing and prevents you from potentially damaging your portfolio’s returns.
The investment strategy of dollar-cost averaging can be used by any investor who wants to take advantage of its benefits, which include a potentially lower average cost, automatic investing over regular intervals of time, and a method that relieves them of the stress of having to make purchase decisions under pressure when the market is volatile.
Dollar-cost averaging may be especially useful to beginning investors who don’t yet have the experience or expertise to judge the most opportune moments to buy.
