Dollar-cost averaging is the strategy of spreading out your stock, fund or other investment purchases by buying at regular intervals and in equal amounts.
- The practice of investing a consistent dollar amount in the same investment over a period of time.
- The method of dollar-cost averaging reduces investment risk. Remember that it is almost impossible to determine a market bottom, which is why dollar-cost averaging can help smooth out market timings. It is a simple discipline approach that help investors avoid the temptation to “time the market” and reduce the impact of volatility. With dollar-cost averaging, more shares are purchased when prices are falling but less as they rise.
- Dollar-cost averaging reduces the emotional component of investing. by investing mechanically. By buying a certain dollar amount of the preferred investment, the fluctuation of the wild price swing of the market (down and up market) could be avoided.
- Dollar-cost averaging allows investors to avoid bad timing of purchasing an investment. If investors invest all the money at once for a particular investment and then there is a big market downturn, investors would have ended up loosing more money than if they periodically purchase a set amount for that investment.
- An inexperienced investor should consider using dollar-cost averaging when purchasing an investment.
Therefore, making periodic investments, by using dollar-cost averaging, regardless of what direction the market is moving, is an effective way to invest for the long term.