If you have done research into the basics of investing, you may have come across the term “Dollar Cost Averaging.” You might already be doing it!
The term refers to systematically investing a specific dollar amount at a certain interval of time, typically monthly. By only investing a set dollar amount, investors will buy more shares when prices are low and less shares when prices are high. Dollar-cost averaging allows the investor to spread out their investments and not try to time the market where investors essentially guess if prices are low. The average cost per share is typically lower than the average price of the market shares purchased in a fluctuating market over long periods of time, such as an S&P index fund investment over 20+ years.
Many investors dollar cost average without even knowing it with an employer-sponsored retirement plan such as a 401(k). Typically, investors have a certain amount withheld from their paycheck every pay period and invest the cash into an index fund or target-retirement fund over many years. This is a perfect example of dollar-cost averaging!
As appealing as dollar-cost averaging is, it does not guarantee a positive result in an investment portfolio. An investor can invest the same dollar amount in one stock that is decreasing in value, buying more and more shares of the stock without ever getting any return if the stock never rebounds.
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