Financial Education Series
Dollar-Cost Averaging
A Strategy for Consistent Investing
Dollar-cost averaging is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of market conditions. This disciplined approach can help reduce the impact of market volatility on your portfolio.
Why This Matters
Market timing is notoriously difficult, even for professional investors. Dollar-cost averaging removes the guesswork and emotional decision-making that often leads to poor investment outcomes.
How It Works
The Mechanics
Consistent Investments
Invest the same amount of money (e.g., $500) at regular intervals (e.g., monthly).
Automatic Share Allocation
When prices are high, your fixed amount buys fewer shares; when prices are low, you buy more shares.
Price Averaging
Over time, your average cost per share is typically lower than if you attempted to time the market.
Example Scenario
Month 1: $100/Share
$500 investment buys 5 shares at $100 each.
Month 2: $80/Share
$500 investment buys 6.25 shares at $80 each.
Month 3: $120/Share
$500 investment buys 4.17 shares at $120 each.
Result
Total invested: $1,500. Total shares: 15.42. Average cost per share: $97.28, which is less than the average price of $100.
Benefits and Considerations
Key Points
Advantages
Considerations
Getting Started
Implementation Steps
Step 1: Choose Your Investments
Select index funds, ETFs, or individual stocks that align with your investment goals.
Step 2: Determine Your Amount
Decide how much you can invest regularly (weekly, monthly, or quarterly).
Step 3: Set Up Automatic Transfers
Most brokerages and retirement accounts offer automatic investment plans.
Step 4: Stay Consistent
Commit to your plan even during market downturns – that's when the strategy is most effective.
This content is educational in nature and updated as of March 2024. We aim to relay factual financial information, similar to how a newspaper would report market data. For complete information about our services, please review our Terms of Service.