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
Reduces impact of market volatility
Eliminates emotional decision-making
Creates investing discipline
Works well with automatic investments
Considerations
May underperform lump-sum investing in rising markets
Transaction costs can add up with frequent trades
Tax implications for non-retirement accounts
Requires long-term commitment to be effective

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.